Growth is the most important thing on the minds of many stock investors, but not all strategies are created equal. Most people’s returns do not match published figures for the S&P 500 or NASDAQ for certain time periods. You should also be able to beat market indices over the long term in your 401 (k) or IRA. If you want to drive growth and unleash the magic of the market, consider these four investment approaches.
1. Hold for the long term
Too many investors are their worst enemy. People get nervous when the market falls, so they sell stocks that have already lost value. This is exactly how you lock in your losses and miss the eventual rally in the bull market. Throughout the history of capital markets, stocks have consistently returned to long-term growth as the global economy grows. It is not a guarantee of future performance, but it is a strong fundamental indicator.
There is nothing wrong with making some modest adjustments to your allocation as market conditions change. These adjustments could include a rebalancing or a slight change in valuation based on a rotation. For the most part, however, you want to make a long-term plan and stick to your guns. Let your winners keep winning.
Volatility is a necessary evil in stock investing, and the stocks that generate the most growth tend to experience more volatility along the way. It’s impossible to know exactly on which days a stock will rise and fall, but the gains will outweigh the losses for a well-distributed portfolio. The best way to unlock returns is to stay invested during all of the growing days of your stocks.
2. Go beyond index investing
Index investing is great for most people, and it’s only a good idea to adopt a more active strategy if you do it responsibly. Having said that, you can’t beat the market if you only own index funds. Technically, you can’t even quite match the market with index funds because you incur taxes, fees, and trading costs, albeit tiny.
Over the long term, the average rate of return for index funds has been around 8-10%. There is nothing wrong with this return, but if you want to get the most out of the hard-earned savings that you are putting into practice, you need to go beyond the cues and stay disciplined in stock picking.
3. Invest in megatrends
Exposing your investments to new high growth economic trends is a great way to generate spectacular returns. Some industries will grow rapidly and some geographic regions will overtake others. Companies at the forefront of these trends will enjoy higher income and profits, which should increase the value of their stocks over the long term.
Software is one of the fastest growing things in the new economy. Artificial intelligence, automation, data analytics and cybersecurity are sectors that are almost guaranteed to grow over the next decades. Healthcare is also transforming through genomics, telehealth, biotechnology, robotics and nanotechnology. Emerging economies have expanding middle classes that will create a growing demand for goods and services that have been more common in developed countries for years. These are some of the most important megatrends that are catalyzing economic growth in the future.
Investors can capitalize by buying shares of disruptive companies that will become future leaders. Alternatively, you can use niche-focused exchange traded funds (ETFs) to invest in all stocks in those categories. This allows you to bet on the trend rather than just one company. Either way, this strategy should create more potential than indexing or owning mature companies.
4. Learn from factor investing
Factor investing and smart beta aren’t quite the hot topics they were a few years ago. The protracted bull market that fostered growth may have this effect. There are long-term studies that suggest factor investing can be a reliable way to outperform the market, and the logic still holds.
Factors are different characteristics of stocks which result in higher returns. For example, cheap stocks don’t have as much growth factored into their price, so they perform better, all other things being equal. Small businesses often have more growth opportunities than giants that already saturate their target markets. Profitable businesses offer more stability than unprofitable businesses, so they’re less likely to shut down or lose value. Companies with strong balance sheets and stable cash flows are less prone to large losses. Dynamic stocks generate gains because they have a disproportionate share of investor interest.
Factor-focused ETFs and smart beta are probably the best tools for this strategy. Identifying a full allocation of stocks with these characteristics can be a lot of work, and it is even more work to manage that portfolio over time. Factor investing is a semi-passive strategy, so you can outsource this management at relatively low expense ratios, saving you the headaches, annual fees and trading costs incurred with active management.