What Does Long-Term Growth (LTG) Mean?
Long-term growth (LTG) is an investment strategy that aims to increase the value of a portfolio over a multi-year time frame. Although long-term is relative to an investors’ time horizons and individual style, generally long-term growth is meant to create above market returns over a period of ten years or more. Because of the longer time frame, long-term growth portfolios can be more aggressive in holding a larger percentage of stocks versus fixed-income products like bonds. Whereas an intermediate term balanced fund might have 60% stocks to 40%, a long-term growth fund might have 80% stocks and 20% bonds.
Understanding Long-Term Growth (LTG)
Long-term growth is meant to do exactly what it says - deliver portfolio growth over time. The catch is that the growth can be uneven. A long-term growth portfolio may under-perform the market in the first years and then outperform later, or vice versa. This is a problem for investors in a long-term growth fund. Even if a fund delivers good average growth over a decade, for example, the performance year to year will vary. Therefore, investors can have very different outcomes depending on when they buy into the fund and how long they hold. Timing investments is, of course, a problem facing every market participant and not just long-term growth fund investors.
Long-Term Growth (LTG) and Value Investing
The core advantage to long-term growth is that short-term price fluctuations are not of major concern. Similarly, many value investors focus on stocks with long-term growth potential, searching for companies that are relatively inexpensive with strong fundamentals. Then they simply wait until they increase in value as the market catches on to their fundamental strength before selling. Individual investors often benefit from a long-term growth focus, and that may lead them towards value investing as a strategy. However, long-term growth simply refers to the longer period over which returns are sought, not a particular investment style like value investing.
Long-term funds are just as likely to buy the market through various indexing products as they are to seek out undervalued stocks. Value investing in particular can be difficult for fund managers to stick to for the long-term. Although investors in long-term growth funds are told to expect a decent average return over multiple years, less patient investors are free to pull out unless the fund has lock-up period—something that is usually found in hedge or private funds. If a typical long-term growth fund has too many mediocre years, then capital will start to leave as investors seek better market returns. This can force a fund to prematurely trim holdings before the market value catches up with the intrinsic value of the stocks.