Although some investors may be content to generate income from their portfolios without growing their overall value, most investors would like to see their nest eggs increase in value over time.
There are different ways to increase the value of a portfolio. The best approach for a given investor will depend upon various factors such as their financial goals, the types of investment they choose,risk tolerance, investment time horizon, and the amount of money that they have to invest.
Some approaches take more time or have more risk than others. However, there are tried-and-true methods that investors of all stripes have used to grow their savings and investments.
Key Takeaways
- Growth can refer to increasing account value or capital appreciation of assets.
- Growing the value of an investment portfolio can be difficult as it's impossible to time the market and because many events that affect investments are out of your control.
- Growth in the value of your accounts, and by how much, will depend on a variety of factors, such as risk tolerance, time horizon, and the amount of principal invested and available to invest.
- There are a few strategies that you can employ to help your portfolio grow, such as a buy-and-hold strategy, diversification, and dollar-cost averaging.
Defining Growth
Growth can be defined in several ways when it comes to investing. In the most general sense, any increase in account value can be considered growth. This increase can result from, for example, the interest paid on a certificate of deposit, or from higher closing prices from one day to the next of stocks owned, or even when you deposit additional money into your investment account.
However, where investment return is concerned, growth usually refers to capital appreciation, where the price or value of the investment increases over time. Such growth can take place over both the short and long term, but substantial growth in the short term generally carries a high degree of risk.
Here are seven strategies that you can use to grow the value of your portfolio of investments.
1. Buy and Hold
Buying and holding investments is perhaps the simplest strategy for achieving growth. If you have a long time to invest before needing your money, it can also be one of the most effective. Those investors who simply buy stocks or other growth investments and keep them in their portfolios with only minor monitoring are often pleasantly surprised with the long-term results.
An investor who uses a buy-and-hold strategy is typically not concerned with short-term price movements andtechnical indicators.
Total growth refers to the capital appreciation of an investment plus any income it pays out. For example, stocks that pay dividends offer investors the opportunity for an increase in value due to a rise in the price of their shares plus the increase in value when dividend payments are credited to their accounts.
2. Market Timing
Those who follow the markets or specific investments closely, such as day traders, may be able to beat the buy-and-hold strategy if they can consistently time the markets correctly to buy when prices are low and sell when they are high.
This strategy will yield much higher returns than simply holding an investment over time, but it also requires the ability to gauge the markets, entry points, and exit points successfully.
The average investor does not have the time to watch the market on a daily basis. Neither do they have the trading experience nor the necessary access to relevant, real-time data. Therefore, it is better to avoid attempts to time the market and focus on other investing strategies better geared toward long term investing.
3. Diversification
This strategy is often combined with the buy-and-hold approach. Different types of risk, such as company risk and interest rate risk, can be reduced or eliminated through diversification. Diversification refers to the process of investing in different types and classes of assets so as to reduce the risk associated with any one investment.
Numerous studies have proven that asset allocation is one of the key factors in investment return, especially over longer periods of time.
The right combination of stocks, bonds, and cash can allow a portfolio to grow with much less risk and volatility than a portfolio that is invested completely in stocks. Diversification works partly because when one asset class is performing poorly, another is usually doing well.
4. Invest in Growth Sectors
Investors who want aggressive growth can look to sectors of the economy such as technology, healthcare, construction, and small-cap stocks to get above-average returns in exchange for greater risk and volatility. Some of this risk can be offset with longer holding periods and careful investment selection.
Note
An investment advisor may be able to help you grow your portfolio's value, especially if your interests don't include the markets and investing. However, be aware that not all investment advisors are successful. Do your homework first by researching potential advisors' backgrounds and experience. And always ask for an advisor's performance results.
5. Dollar-Cost Averaging
A common investment strategy, dollar-cost averaging (DCA), is used most often with mutual funds. Using DCA, an investor allocates a specific dollar amount to periodically purchase shares of one or more specific funds.
Because a fund's net asset value (NAV) will vary from one purchase period to the next, an investor can lower the overall cost basis of the shares as fewer shares are purchased when the fund price is higher and more shares are bought when the price declines. DCAthus allows the investor to reap a greater gain from the fund over time.
Another advantage of DCA is that investors don’t need to worry about buying at the top or bottom of the market or trying to timetheir transactions. They simply commit to investing a sum of money regularly. In this way, they grow the value of their holdings via an ever larger number of shares and position themselves to benefit from the capital appreciation of those shares.
6. Dogs of the Dow
Michael O'Higgins outlines this simple strategy in his book, Beating the Dow. The "dogs" of the Dow is a stock-picking strategy that consists of selecting the Dow stocks with the highestdividend yields. Those who purchase these stocks at the beginning of the year and then adjust their portfolios annually have usually beaten the return of the DJIA index over time(although not every year).
There are several unit investment trusts (UIT) and exchange-traded funds (ETFs) that follow this strategy. So, investors who like the idea but don't want to do their own research of individual stocks can purchase these stocks quickly and easily with a single investment.
7. CAN SLIM
This method of picking winning stocks based on specific growth characteristics that position them for major price moves upward was developed by William O'Neil, founder ofInvestor's Business Daily. His overall idea was that a sound investment strategy based on proven rules was the key to successful long-term growth investing.
His methodology is quantified by the acronym CAN SLIM. It stands for:
- C: The (C)urrent quarterly earnings per share (EPS) of a company need to be at least 18% to 20%higher than they were the year before.
- A: The (A)nnual earnings per share needs to reflect material growth for at least the previous five years.
- N: The company needs to have something (N)ew going on, such as a new product, a change of management, etc.
- S: The company should be trying to repurchase outstanding (S)hares, which is often done when companies expect high future profits.
- L: The company needs to be a (L)eader in its category instead of a laggard.
- I: The company should have some, but not too many, (I)nstitutional sponsors.
- M: The investor should understand how the overall (M)arket affects the company's stock and when it can best be bought and sold.
Because it involves time and effort on an ongoing basis, CAN SLIM isn't an investing approach for everyone.
How Can You Make Your Portfolio Grow Faster?
Ways to make your portfolio grow faster include choosing stocks over bonds, investing in small-cap companies, investing in low-fee funds, diversifying your portfolio, and rebalancing your portfolio regularly.
What Is the 80/20 Rule of an Investment Portfolio?
The 80/20 rule of an investment portfolio states that 20% of a portfolio's holdings should constitute 80% of its returns and similarly, 20% of holdings could contribute to 80% of losses.
Is a 70/30 Portfolio Aggressive?
A 70/30 portfolio consists of 70% stocks and 30% bonds. It is more aggressive than a portfolio allocation of 60% stocks and 40% bonds because it consists of more stocks, which are considered to be higher risk than bonds.
The Bottom Line
These are just some of the simpler methods for making your money grow. There are more sophisticated techniques used by both individuals and institutions that employ alternative investments, such as derivatives, that can control the amount of risk taken and amplify 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.
