Investing Basics: What is Growth Investing?

As you begin investing, it’s important to understand your goals, and know what different assets are going to help you accomplish those goals. One of the things you should understand as you begin investing is how growth investing works — and how it can help you.

Basic Overview of Growth Investing

In the simplest terms, growth investing is about boosting your returns so that your portfolio grows at a more rapid pase. Growth investments are those that can be expected to provide you with a significant increase in value in a relatively short period of time. These are investments that, compared with the overall market or (in the case of stocks) industry, should see an above-average rate of growth.

Growth investing isn’t about indexing and keeping pace with the market; it’s about attempting to find assets that will help you beat the market. Two of the more popular strategies that are associated with growth investing include:

1. Companies that are seeing big growth — or could potentially see big growth. This includes startups, and small caps.
2. Assets, like commodities or currencies, that are considered “risky.” The chance to super-charge your portfolio with large gains is one method of growth investing.

As you can see, growth investing is a little different from value investing. With value investing, the emphasis is on looking at current performance, and determining which assets are trading at below the price they should be. Value investing is mainly about bargain-hunting, and looking for assets that are fundamentally sound.

Growth investing, on the other hand, is about considering the future, and determining which assets are likely to experience significant returns on capital in the near future. It’s about the potential of an investment, and its ability to grow.

Choosing Growth Investments

Choosing a growth investment requires study and discipline. Some of the things to consider as you evaluate potential growth investments include:

• Strong historical earnings growth: If the company has seen as solid history of earnings growth, there is some justification in thinking that future growth is a real possibility.
• Projected earnings growth: You also need to look at the projected earnings growth. If historical data shows that earnings growth has been slowing, the projections for future growth are likely to decrease. If it looks as though earnings growth is slowing, the investment probably isn’t a good choice.
• How are costs being controlled?: In the case of stocks, it’s important to look at how costs are being controlled by the management. If costs are skyrocketing as well as earnings, you could easily see a collapse in price down the road as margins shrink. If you are looking at emerging market bonds, increased government spending at a rapid rate could mean that a default is on the way.

Consider the factors involved, and how long an investment is likely to sustain its level of growth. Many growth investments are not suitable for your long-term portfolio. At some point, many of these investments see slowed growth, and it becomes time to sell, and replace the investment with something that is growing at a better pace.

It’s important to note, too, that a rapid rise in value can be followed by an equally rapid drop in value. If the investment has reached bubble level, you want to sell before the bubble bursts.

Do You Have the Risk Tolerance for Growth Investing?

You need to be careful about growth investing, since you might be taking bigger risks — and that means a bigger chance of loss. While many growth investments provide you with the chance to see big gains in a short period of time, the losses can also be large. Especially if you use leverage in your positions.

Carefully evaluate your risk tolerance. If you can afford to add a little more growth to your portfolio, you can boost your returns, and create more wealth. Just be measured in your approach, and take the time to learn about the investments that you are employing to help you reach your goals of increased growth.