What Is a Capital Growth Strategy?
A capital growth strategy seeks to maximize capital appreciation of an investment portfolio over the long term through an asset allocation geared to securities with high expected returns.
Investors who use a capital growth strategy seek out companies and investments with the potential to grow at a higher rate compared to the market or the industry. Capital growth investors are willing to trade a certain amount of risk in order to potentially reap higher returns.
- Investors who opt for a capital growth strategy want to increase their gains by selecting investments that have the potential to grow long term at a higher rate compared to the market.
- A portfolio that focuses on capital growth will contain approximately 65% to 70% equities, 20% to 25% fixed-income assets, and the balance in money market securities or cash.
- Capital growth investors can simplify the investment process by choosing from packaged products including mutual funds and exchange traded funds (ETFs) that focus on capital appreciation.
- Sophisticated capital growth investors might build a portfolio of individual stocks balanced with fixed-income assets or hedging strategies that include options and futures.
- Target-date funds and lifestyle funds are other options that include capital growth strategies based on the investor's age and risk tolerance.
How a Capital Growth Strategy Works
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% to 70% equities, 20% to 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.
Many capital growth investors will select a moderate growth objective, while others will opt for a high growth objective. Moderate growth investors might purchase stocks of established blue-chip companies. Investors with a high growth objective are willing to invest in more speculative assets, such as growth stocks from companies that have little or no current profits but have the potential for high future gains.
Very aggressive portfolio strategies also aim 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. A common goal of a capital growth strategy is to save for retirement while simultaneously funding other long-term objectives, such as providing for a child's college education or building a legacy for future generations. Long-term investors can take on the higher risk of equities when they have more time to recover from sharp losses.
Asset allocation by age is an important investment strategy that focuses on changing an investor's asset allocation based on the different stages of life. Investors in their 20s and 30s employ a different strategy than those in their 40s and 50s. Likewise, investors approaching retirement or already in retirement have different strategies and objectives.
In general, younger investors can tolerate more risk and would be more likely candidates for a strategy with a high growth objective compared to investors who are older and are looking for capital preservation.
Constructing a Capital Growth Strategy
Investors have a multitude of choices when building an allocation that pursues capital growth. More sophisticated investors may choose to construct a 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 a portfolio of individual securities can choose from packaged products including mutual funds and exchange traded funds (ETFs). 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 a lifestyle fund that maintains a static allocation based on a choice of risk levels. For capital growth, an investor would choose a moderate or aggressive allocation.