What is a Capital Growth Strategy
BREAKING DOWN Capital Growth Strategy
Portfolios with a capital growth strategy consist mainly of equities, also known as stocks. The exact proportion of equities to the total portfolio will vary according to the individual investor's investment horizon, financial constraints, investment goals and risk tolerance.
In general, a capital growth portfolio will contain approximately 65-70% equities, 20-25% fixed-income securities and the remainder in cash or money market securities. While seeking high returns, this mixture still somewhat protects the investor against a severe loss in portfolio value if the higher-risk equity portion of the portfolio takes a plunge. Note that an aggressive portfolio strategy also aims to maximize capital growth, but these strategies are of considerably higher risk, sometimes consisting entirely of equities.
A capital growth strategy is suitable for most investors with a long time horizon, typically 10 years or more. The most common goal of a capital growth strategy is to save for retirement while funding a college education or building a legacy for future generations are also popular objectives. Long-term investors can take on the higher risk of equities when they have more time to recover from sharp losses. Over rolling periods of 15 years or more since 1973, the S&P 500 Index has not suffered a negative average annual return. In fact, in the worst 15-year period from 1973 to 2016, the index delivered an annual return of 3.7% while in its best 15 years it delivered a return of 20%.
Constructing a Capital Growth Strategy
Investors have a multitude of choices when for building an allocation that pursues capital growth. More sophisticated investors may choose to construct of portfolio of individual stocks that can be balanced with fixed income and cash or through hedging strategies that leverage options and futures.
Investors lacking the time or knowledge to manage portfolio of individual securities can choose from packaged products including mutual funds and exchange-traded funds. These are available in dozens if not hundreds of different categories. For capital growth, an investor would be well served to own funds or ETFs that provide diversified exposure to stocks with value and growth characteristics as well as different market capitalizations and geographies.
For a one size fits all approach, investors can select a target-date fund that holds an allocation of stocks, bonds and cash that becomes more conservative as the target date approaches. Another pre-set allocation choice is lifestyle funds that maintain a static allocation based on a choice of risk levels. For capital growth, an investor would choose a moderate or aggressive allocation.