Although there is a small group of investors who are content to generate income from their portfolios without developing them, most investors would like to see their nest egg grow over time. There are many ways to develop a portfolio, and the best approach for a given investor will depend on various factors such as their risk tolerance, time horizon and the amount of capital that can be invested.
There are several ways to grow a portfolio. Some take longer or pose more risk than others. However, there are proven methods that investors of all persuasions have used to grow their money.
Growth can be defined in many ways when it comes to investing. In the most general sense, any increase in account value can be considered growth, such as when a certificate of deposit pays interest on its principal. But growth is usually defined more specifically in the field of investing as capital appreciation, where the price or value of the investment increases over time. Growth can take place in both the short and long term, but substantial short-term growth generally carries a much higher degree of risk.
buy and keep
Buying and holding investments is perhaps the simplest strategy for achieving growth, and over time it can also be one of the most effective. Investors who simply buy stocks or other growth investments and hold them in their portfolios with only minor oversight are often pleasantly surprised at the results.
An investor using a buy and hold strategy is generally not concerned with short-term price movements and technical indicators.
Those who follow the markets or specific investments more closely can beat the buy and hold strategy if they are able to time the markets correctly and consistently buy when prices are low and sell when they are low. are high. This strategy will obviously yield much higher returns than simply holding an investment over time, but it also requires the ability to properly assess the markets.
For the average investor who doesn’t have time to monitor the market on a daily basis, it may be best to avoid market timing and instead focus on other, more long-term oriented investment strategies.
This strategy is often combined with the buy and hold approach. Many different types of risk, such as business risk, can be reduced or eliminated through diversification. Numerous studies have proven that asset allocation is one of the key factors in investment performance, especially over long periods of time.
The right combination of stocks, bonds and cash can allow a portfolio to grow with far less risk and volatility than a portfolio invested entirely in stocks. Diversification works in part because when one asset class does poorly, another usually does well.
Invest in growth sectors
Investors looking for aggressive growth can look to sectors of the economy such as technology, healthcare, construction, and small-cap stocks to earn above-average returns in exchange for risk and upside. increased volatility. Some of this risk can be offset by longer holding periods and careful investment selection.
Recurring Fixed Amount Purchases – DCA
A common investment strategy, DCA is most often used with mutual funds. An investor will allocate a specific dollar amount which will be used to periodically purchase shares of one or more specific funds. Since the price of the fund(s) will vary from one purchase period to another, the investor is able to reduce the overall cost of the shares, as fewer shares will be purchased during a period when the price of the fund is higher and more shares are bought when the price goes down.
The cost average thus allows the investor to derive greater profit from the fund over time. The real value of DCA is that investors don’t have to worry about buying at the top of the market or trying to time their trades carefully.
Dogs of the Dow
Michael O’Higgins describes this simple strategy in his book “Beating the Dow”. The “dogs” of the Dow Jones are simply the 10 companies in the index with the lowest dividend yields. Those who buy these stocks at the beginning of the year and then adjust their portfolios every year have generally beaten the index’s performance over time (but not every year).
There are several unit investment trusts (UITs) and exchange-traded funds (ETFs) that follow this strategy, so investors who like the idea but don’t want to do their own research can buy these stocks quickly and easily.
This stock picking method was developed by William O’Neil, founder of Investor’s Business Daily. Its methodology is quantified in the acronym CAN SLIM, which stands for:
- C – A company’s current quarterly earnings per share (EPS) (C) must be at least 18-20% higher than it was a year ago.
- A – The (a)annual earnings per share must reflect significant growth over at least the last five years.
- N – The company must have something (N) new in the works, such as a new product, a change in management, etc.
- S – The company should try to buy back its own shares (S) in circulation, which is often done when companies expect high future profits.
- L – The company must be a (L)eader in its category instead of being a laggard.
- I – The company should have some (I)nstitutional sponsors, but not too many.
- M – The investor should understand how the global (M)market affects the shares of the company and when they can best be bought and sold.
These are just a few of the easiest ways to grow money. There are much more sophisticated techniques used by both individuals and institutions that use alternative investments such as derivatives and other instruments that can control the level of risk taken and magnify the possible gains that can be made. For more information on how you can find the right growth strategy for your portfolio, consult your stockbroker or financial advisor.