Is growth investing a good strategy?

Here’s what you need to know about growth investing.
Growing plants | Wealthify
Reading time: 8 mins

When it comes to investing, there are many strategies you can adopt. And if you want to make your money work harder, it’s important to choose the right investment approach. Here’s what you need to know about growth investing.

 

What is a growth investing?
In the investment world, there are two main ways you can build wealth. The first is that your investment pays out an income (e.g. interest and/or dividends) on a regular basis. The second way is that you buy when the price is low and sell when it’s higher – the price in between what you bought your investment for and what you sold it for is your profit and this is exactly what growth investing is about. It’s an investment style that focuses on increasing your wealth through capital appreciation – where the value of your investment rises.

With growth investing, the aim is to try and find companies that could provide higher returns than their sector or the overall market. It’s simply about investing in early-stage companies that are on the rise and could potentially be the next big thing – think Facebook or Amazon!

 

What are the pros and cons of growth investing?
Growth investing can be a great way to build your future wealth, but before you take the plunge, it’s important to weigh the pros and cons of this investment strategy.

 

Pros: There’s a chance for significantly higher returns
If you manage to find a winner, you could end up with impressive returns. Take Amazon for example, if you had invested $500 in 1997, back when the company first sold shares on the stock market, you would have bought 27 shares, priced $18 each. About 22 years later, provided you kept the shares, you would have found yourself with 324 shares worth $568,620 and priced $1,755 each – that’s a total return of 113,000%1.

 

Cons: It comes with a higher investment risk
So, with growth investing, it’s possible to make significantly higher returns, but remember, there’s no guarantee this will happen. If you invest in a company that fails to expand, you could end up with less than you initially invested. Growth investing can be a risky strategy, as there’s no way to predict the future – a new company may be doing well right now, but will it be thriving in ten years? Nobody can know for sure and investing in early-stage companies is typically a risky move as they may not have any revenue for a number of years.

Back in the 1990s, many new internet-based companies were launched, and a plethora of investors thought they would become very profitable in the future and invested in them. Well, they were wrong. Many of these companies didn’t make it, and many disappeared, along with the investors’ money.

 

Pros: It’s a good way to support start ups
If anything, growth investing can help start-ups grow. As mentioned above, investing in new businesses does come with some risk, but it can be beneficial to society as a whole, especially if your money is supporting companies that are innovating to make a positive difference. If you think about it, it’s also what investing is for – giving early-stage companies the funds they need to expand and maybe change the world. And if it works, you get to make some happy returns at the end!

 

Cons: You may not get any income
Since you’ll typically be investing in early-stage companies, you may not receive any income, also known as dividends, from them – as these payments come from a company’s profits. The thing with new companies is that they may use all their earnings, resources, and profits to grow and generate revenue, meaning you can’t rely on income-based profits.

 

Things to consider with growth investing
If you want your money to flourish over time, growth investing could help. However, before you select your investments, there’s a few things to consider if you want to make the most of your journey.

 

Do your research
With growth investing, you’ll need to do some research to inform your investment decisions. To find potential winners, it’s important to spend some time researching companies and going through their results as well as balance sheets. It doesn’t sound fun, but it’s essential if you want to make the right pick. And once you’ve selected your companies, you’ll need to monitor their activities and performance on a regular basis, so you can adjust your investment plan accordingly.

 

Consider your risk appetite
As stated above, growth investing is quite a risky strategy, so before you commit to it, make sure you consider your risk appetite. Would you define yourself as cautious or adventurous? How would you feel if your investments were to go down in value? And are you willing take a lot of risk it means there’s a chance for higher returns? There’s no right or wrong answer here, it all depends on your preferences, financial situation, and personal circumstances.

 

Diversify your investment plan
Many people will find growth investing too risky but it’s possible to mitigate the risk. One way to do this is to diversify your investment plan by buying other investment types. So, instead of putting all your money in early-stage companies, you could invest some in more established companies and consider other investments, such as bonds or property. You could also spread your money across different regions and sectors. The aim here is to invest your money in different things, so your returns don’t depend on just one or two investments, meaning the risk of losing everything will effectively decrease.

 

Think about the long-term
Growth takes time and if you want to see results, you’ll need to be patient – after all, Amazon didn’t become successful overnight, it took years. Same with Apple and Facebook! So as a growth investor, you may want to think long-term and give your investment enough time to potentially flourish and mature. In fact, the longer you remain invested, the more likely you are to see positive returns. For instance, people, who stayed invested in the FTSE 100 for any 10-year period between 1984 and 2020, have had an 89% chance of making a gain2.

 

Ask for help
If you’re too busy or don’t feel confident enough to do the picking and investing yourself, why not ask for help? There are many online investment platforms that will do the hard work for you. At Wealthify, for example, we’ll build you a diversified Plan based on your risk appetite and we’ll manage it on an ongoing basis, so it stays on track. All you need to do is choose the risk level that suits you and how much you want to invest – you can start with as little as £1!

 

References:

1: https://www.fool.com/investing/2019/11/24/if-you-invested-500-in-amazons-ipo-this-is-how-muc.aspx

2: Data from Bloomberg

 

Past performance is not a reliable indicator of future results.

 

Please remember the value of your investments can go down as well as up, and you could get back less than invested.

 

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