Although there is a small group of investors who are content to generate income from their portfolios without growing them, most investors would like to see their nest eggs increase over time. There are many ways to grow a portfolio, and the best approach for a given investor will depend upon various factors such as their risk tolerance, time horizon, and the amount of principal that can be invested.
There are several ways to make a portfolio grow in value. Some 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 money.
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, such as when a certificate of deposit pays interest on its principal. But growth is usually defined more specifically in the investment arena as capital appreciation, where the price or value of the investment increases over time. Growth can take place over both the short and long term, but substantial growth in the short term generally carries a much higher degree of risk.
1. Buy and Hold
Buying and holding investments is perhaps the simplest strategy for achieving growth, and over time 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 results.
An investor who uses a buy-and-hold strategy is typically not concerned with short-term price movements and technical indicators.
2. Market Timing
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 high. This strategy will obviously yield much higher returns than simply holding an investment over time, but it also requires the ability to correctly gauge the markets.
For the average investor who does not have the time to watch the market on a daily basis, it may be better to avoid market timing and focus on other investing strategies more geared for the long-term instead.
This strategy is often combined with the buy and hold approach. Many different types of risk, such as company risk, can be reduced or eliminated through diversification. 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.
5. Dollar-Cost Averaging (DCA)
A common investment strategy, DCA is used most often with mutual funds. An investor will allocate a specific dollar amount that is used to periodically purchase shares of one or more specific funds. Because the price of the fund(s) will vary from one purchase period to the next, the investor is able to lower the overall cost basis of the shares because fewer shares will be purchased in a period when the fund price is higher and more shares are bought when the price declines.
Dollar-cost averaging thus allows the investor to reap a greater gain from the fund over time. The real value of DCA is that investors don’t need to worry about buying at the top of the market or trying to carefully time their transactions.
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 highest dividend 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 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 can purchase these stocks quickly and easily.
7. CAN SLIM
This method of picking stocks was developed by William O'Neil, founder of Investor's Business Daily. His methodology is quantified in the acronym CAN SLIM, which stands for:
- C – The (C)urrent quarterly earnings per share (EPS) of a company needs to be at least 18% to 20% higher than they were a year ago.
- 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, change of management, etc.
- S – The company should be trying to repurchase its own (S)hares outstanding, 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.
The Bottom Line
These are just some of the simpler methods for making money grow. There are much more sophisticated techniques used by both individuals and institutions that employ alternative investments such as derivatives and other instruments 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.