Your 5-minute guide to growth investing

Q: What is a growth investing strategy?

Identifying companies that exhibit strong potential for growth in earnings and stock price over time. Picking stocks should be done through thorough analysis of a company's fundamentals, including its growth rate, future earnings potential, and overall valuation.

Q: How do you choose growth stocks?

Choosing the right growth stock involves a multi-faceted approach. Compare a company's intrinsic value to its current stock price and the overall market to find stocks that appear to be undervalued compared to their industry peers or market value.

Q: What are the risks of growth investing?

While there is potential for higher returns with growth investing, there are also inherent risks. Growth stocks may be more volatile than value stocks, and their stock price can fall as quickly as it climbs. Understanding your personal risk tolerance is crucial.

GROW YOUR NEST EGG

Until money grows on trees, we'll need to settle for the alternative of investing for growth opportunities—and the sooner it starts, the better. This five-minute guide to investing for growth covers everything you need to know, starting with a quick definition and ending with three mistakes growth-oriented investors often make. We also introduce our own strategies for investment growth—the Global Dividend strategy and Adaptive Global ETF strategy.

The basics of growth

Growth is simply a way to define your investment goal. When you’re investing for growth, your objective is to see your capital (the money you initially invested) appreciate, preferably by as much as possible. This is in contrast to investing for income, where your objective is to receive regular income (often in the form of dividends) from your investments.

Sectors, markets, and companies poised for rapid growth often exhibit volatility. That said, this can lead to significant capital appreciation. That said, you risk considerable losses if your portfolio isn’t carefully structured to balance risk and return.

Growth and suitability

Investing for growth can come with greater risk, particularly in the short term, so it’s not for very risk-averse investors or those whose investment time horizon is quite short. Even the most aggressive growth investor, however, may include some fixed income and cash equivalent investments for rebalancing purposes in the event of a significant market downturn.

When we think of growth investing, we tend to think of day traders and the tech bubble—frenzied buying and selling, where some people win big and others lose everything. But these are stereotypes. You can invest for growth in a measured, disciplined manner that doesn't put your long-term interests in jeopardy.

Withdrawals from growth investments

Depending on whether the investment is registered—such as an RRSP or TFSA—withdrawals may incur penalties. Reflect on what your overall investment goal is and if a growth investing strategy fits your needs, such as having access to money when you need it. Pulling investment capital out of your portfolio is to be expected at times, but if it's not performing in those moments, you may be hindering future appreciation or simply realizing a loss. For those with shorter investment horizons, you’re likely better off investing in less volatile options.

The benefits of global diversification

We believe the best strategy for growth investing is to take a global approach. When you invest globally, you're investing in both the mature economies of North America and Europe, as well as emerging economies such as China, India, and other markets where rapid economic growth is underway. While a growth-focused portfolio may have additional short-term risks, global investing can actually help mitigate them through broader exposure by country and sector. We invest globally in all our strategies, regardless of whether a client's goal is to grow capital or receive regular investment income, because global diversification has proven to be an essential risk management tool.

Income strategies and growth

With an income-oriented strategy, such as our Disciplined Dividend Growth approach, growth comes in the form of dividends and share prices that both increase over time. Reinvested dividends help you achieve long-term growth.

Our core belief is that companies that have consistently grown their profits and increased their dividends inevitably produce above-average returns with lower volatility. We look for businesses with a history of growing and paying their dividend as a sign that their business model can produce sustainable profits—and that's exactly the kind of company you want to be invested in for the long term.

The dividend growth investing model has proven over time to produce higher returns with lower risk than other approaches. In addition, in times of weak equity markets, investors are "paid to wait" in the form of ongoing dividend income, which in many cases is also tax-efficient.

Accommodating personal values

Any of our strategies can be modified to align with your values. When investing in stocks, we evaluate a company based on its environmental, social, and governance (ESG) performance, as well as its underlying numbers, to help determine its prospects for long-term success. Academic studies on this subject, according to the Responsible Investment Association and MSCI, have suggested that ESG performance is associated with lower risk. There’s additional evidence that socially responsible investments perform better over the long term. The research has been limited to mutual funds thus far, but we believe that ESG factors merit consideration in any investment strategy. One of the challenges with ESG investing, however, is that evaluating a company is often a question of ranking its ESG performance relative to its peers, making it more difficult to identify a clear winner.

Exchange-traded funds for growth

We feel strongly that exchange-traded funds ("ETFs") are an excellent way to grow your capital. If your goal is income, we feel there are better options such as purchasing dividend-producing public and private equities and alternative fixed income investments.

ETFs are a class of securities that can be bought and sold on global stock exchanges. An ETF trades like stocks and functions like mutual funds, holding multiple securities. There are over 9,000 of these investment products available globally and more than 1,000 that call Canada home, with more innovative products being added every day.

Key advantages of ETFs:

Lower fees than mutual funds, provided you aren’t trading excessively, because there’s no sales load.
Exposure to almost any country, commodity, market, or sector is possible.
You can enter and exit markets quickly to take advantage of short-term opportunities.
They can be bought and sold at any time on global stock exchanges.
Compared to mutual funds, there is more control over the timing of capital gains.
You can often hedge currency risk if needed.

The Adaptive Global ETF Strategy®

The Adaptive Global ETF Strategy® is one of Bellwether's methods of growth investing. To achieve capital growth, it utilizes global exchange-traded funds and the well-respected "core-satellite" approach to portfolio construction. We believe that the best way to inspire confidence in our clients is to have a repeatable, reliable process and the discipline to adhere to it.

Adaptive's four-part, active management process is particularly unique. We use macroeconomic forecasting to understand global market momentum; model the risk and rank performance of indices, countries, sectors, and commodities to identify opportunities; allocate assets so we can take advantage of short-term and long-term trends; and select specific ETFs based on a 9-point test. The end result blends a risk management mindset with a growth orientation to achieve a better balance of risk versus return by capturing opportunity and mitigating downside potential.

Investing in ETFs yourself

If you have a deep interest in financial markets, extra time on your hands to learn the nuances, and are willing to seek out reputable research and insightful intel to help you make the best choices, you could very well be a successful investor on your own.

It can be challenging for those outside the industry to access and interpret the necessary information to adequately assess ETF characteristics and performance, especially when it comes to tracking errors. The same is true about second-guessing economic influences and evaluating short-term opportunities and risks. Not all ETFs are liquid. Some can be hard to sell down the road if they aren’t widely held. If you don’t properly manage your trades, it can become expensive—effectively eliminating one of the major draws of ETFs.

Common growth mistakes

Investing for growth can be a daunting experience, one where everybody promises they have the next big, exclusive opportunity to sell you on. Avoid these three mistakes, and you’re less likely to be led astray by all the shiny objects.

Mistake 1: Ignoring value in the quest for the next hot thing. Growing companies and those in hot sectors may have high stock prices and future earnings expectations. If they fail to deliver, investors may be quick to show their disappointment, causing share prices to plummet and transforming your anticipated profit into a loss. Rather than overpaying for a growth stock, you should be looking for growth at a reasonable valuation. Regardless of your investment objective, you should be aware of the company's growth potential and identify a reasonable entry point of what you're willing to pay per share.

Mistake 2: Investing in actively managed ETFs. When you invest in actively managed ETFs, you may be paying a premium for an arms-length ETF supplier (the company that “manufactures” the ETF and makes it available on the market) to select securities that they believe will outperform their chosen benchmark. We believe a better approach is to invest in passively managed ETFs—ones that simply work to replicate a sector or benchmark—and then actively manage the entire portfolio. In doing so, you can rely on a proven, disciplined strategy, such as the core-satellite approach we use with our Adaptive Global ETF strategy.

Mistake 3: Ignoring the rest of the world. Because you aren’t purchasing shares in blue-chip, dividend-paying, household-name companies, you may feel a little lost. Understandably, this may lead you to seek some measure of comfort and familiarity by investing close to home. This may not be a wise move for growth investors, as North America and Europe aren’t the cradles of innovation they once were. Since the 1980s, China, India, and other emerging economies have become growth powerhouses, and ignoring the benefits of global diversification puts you at risk of compromising your portfolio performance. Of course, these economies are also quite volatile, so you’ll want to ensure you’re balancing risk and return by closely monitoring, actively managing, and properly diversifying your portfolio.

What is a growth investing strategy?

How do you choose growth stocks?

What is the difference between growth investing and value investing?

While both growth investing and value investing aim to generate returns, they do so through different approaches. Growth investors focus on companies that exhibit robust potential for expansion, often at the expense of current profitability, while value investors seek undervalued stocks that are currently trading for less than their intrinsic value. Both are valid investment styles, but diversification is often prudent.

What are the benefits of growth investing?

The primary benefit of a growth investing strategy is the potential for significant capital appreciation. By investing in companies with high growth potential, investors often see their investments outperform the broader market. Additionally, growth stocks typically reinvest their profits back into the company, which can lead to strong earnings growth to help stock prices climb higher, allowing investors to enjoy a compounding effect.

What are the risks of growth investing?

CONTENT