GROW YOUR NEST EGG
Your 5-minute guide to growth investing
Until money grows on trees, we’re stuck having to invest it if we want to see it grow—and we need it to grow if we want to be able to afford to retire early, put our kids through university and buy that cabin in the woods. This five-minute guide to investing for growth covers it all lickety-split, starting with a quick definition and ending with three mistakes growth-oriented investors often make. We also dish on our own strategies for investment growth—our North American Disciplined Dividend Growth strategy and Adaptive Global ETF strategy.
What is investing for growth?
Growth, in an investment context, is simply an objective. When you’re investing for growth, your objective is to see your capital (the money you initially invested) appreciate, usually as much as possible. This is in contrast to investing for income, where your objective is to receive regular income (often in the form of dividends) from your investments.
The sectors, markets and companies that are ripe for rapid growth tend to be volatile. On the up side, this can mean rapid capital appreciation. On the down side, you risk considerable losses if your portfolio isn’t carefully and actively managed to balance risk and return, including diversification.
Is growth the right strategy for me?
Investing for growth can come with greater risk, particularly in the short term, so it’s not for very risk averse investors or those whose investment time horizon is quite short. However, even the most aggressive growth portfolio may hold some fixed income and cash equivalent investments so it can be rebalanced if the market goes bonkers (in a bad way).
When we think of growth investing, we tend to think of day traders and the tech bubble—frenzied buying and selling where some people win big and others lose everything. But these are stereotypes. It’s possible to invest for growth in a way that is measured, disciplined and protects your long-term interests.
Can I withdraw money from a growth investment?
The short answer is yes, but there may be penalties, depending on whether the investment is registered (an RRSP or RESP, for example). The longer answer will ask you to rethink choosing a growth investing strategy for money you’ll need in the near-term. Sure, you can withdraw the money, but if your portfolio is down at the time, you’ll wish you didn’t need to. With a shorter investment time horizon, you’re better off investing in a less volatile strategy.
Where should I invest for growth?
We believe the best way to invest for growth is to invest globally. When you invest globally, you're investing in both the mature economies of North America and Europe and emerging economies such as China, India and other markets where rapid economic growth is taking place. While a growth-focused strategy may have additional short term risks, global investing can actually help manage that risk somewhat by broadening exposure by country and sector. We invest globally in all our strategies, regardless of whether a client's goal is to grow capital or receive regular investment income, because a global approach helps mitigate risk.
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Can an income strategy deliver growth?
The short answer is yes. With an income-oriented strategy, such as our Disciplined Dividend Growth approach, growth comes in the form of dividends and share prices that both increase over time. You achieve the goal of long-term growth when the dividends are reinvested.
Our core belief is that companies that have consistently grown their profits and increased their dividends inevitably produce above average returns with lower volatility. Companies that increase their operating profit and cash flow have the capacity to increase their dividend payout. We look for companies with a history of growing and paying their dividend as a sign that their business model can produce sustainable profits—and that's exactly the kind of company you want to be invested in for the long term.
The dividend growth investing model has proven over time to produce higher returns with lower risk than other approaches. In addition, in times of weak equity markets, investors are "paid while they wait" in the form of ongoing dividend income, which in many cases is also tax efficient.
Are ETFs good for growth?
We feel strongly that exchange-traded funds (AKA ETFs) are an excellent way to grow your capital. (If your goal is income, we feel there are better options than ETFs, such as purchasing dividend-producing public and private equities and alternative fixed income investments.)
ETFs are a class of securities that are bought and sold on global stock exchanges. An ETF is similar to a stock in the way it's traded and similar to a mutual fund in that it holds more than one security. There are more than 5,000 ETFs available globally and more than 700 made right here in Canada, with more innovative products being added every day.
The key advantages of ETFs are:
- Lower fees than mutual funds, provided you aren’t doing a lot of trading, because there’s no sales load
- Access to almost any country, commodity, market or sector
- You can enter and exit markets quickly to take advantage of short-term opportunities
- They can be bought and sold at any time on global stock exchanges
- Increased control over when capital gains are realized compared with mutual funds
- You can often hedge currency risk, if needed
What's the right investment strategy for you?
Yes! Any of our strategies can be executed in a socially responsible way. We evaluate a company on its environmental, social and governance (ESG) performance, as well as its numbers, to help determine its prospects for long-term success. Academic studies on this subject, according to the Responsible Investment Association, has said that ESG performance is associated with lower risk. Also, there’s evidence that socially responsible investments perform better over the long term. So far the research has only been done with mutual funds, but we think there is merit in considering ESG factors in any portfolio. However, one of the challenges with ESG investing is that evaluating a company is often a question of ranking its ESG performance relative to its peers, with no clear winner.
What is Bellwether's ETF strategy?
The Adaptive Global ETF Strategy® is one of Bellwether's methods of investing for growth. It uses global exchange-traded funds and the well-respected “core-satellite” approach to portfolio construction to achieve capital growth.
The hallmarks of the Adaptive strategy are the same as for every Bellwether strategy. We aren’t show-offs. We don’t make decisions based on our guts. We believe that the best way to give our investors confidence is to have a repeatable, reliable process and the discipline to stick to it.
For the Adaptive strategy, that means a four-part, active management process. We use macroeconomic forecasting to understand global market trends; model risk and rank performance of indices, countries, sectors and commodities to identify opportunities; allocate assets so we can take advantage of short-term and long-term trends; and select specific ETFs based on a 9-point test.The end result blends a risk management mindset with a growth orientation to achieve a better balance of risk versus return.
Can I invest in ETFs myself?
The short answer is it depends. If you have a deep interest in financial markets, time on your hands to learn the ins and outs of ETFs and are willing to seek out research and intel to help you make the best choices, you may be a good candidate to invest on your own.
We like to say that ETFs are not all created equal, and it can be difficult for those outside the industry to access and interpret the information they need to adequately assess ETF characteristics and performance, particularly tracking errors. The same is true about second-guessing economic influences and evaluating short-term opportunities and risks. Not all ETFs are liquid. Some can be hard to sell down the road if they aren’t widely held. If you don’t properly manage your trades, it can become expensive—eliminating one of the key benefits of ETFs.
What are some growth investing mistakes?
Investing for growth can feel like the Wild West, full of cowboys trying to chase down the next hot opportunity before the saloon empties out and everyone’s trying to get in on the action. Avoid these three mistakes and you’re less likely to get bucked off the growth bronco.
Mistake #1: Ignoring value in the quest for the next hot thing. Growing companies and companies in hot sectors may have high stock prices based on an expectation of growth. If this expectation isn't realized, the price may decline and instead of a capital gain, you'll be looking at a capital loss. Overpaying for something will never result in profit. Instead, you should be looking for growth at a reasonable price—paying a fair price for the potential future growth of the company—regardless of your investment objective. This mistake has greater relevance to growth investors who are picking stocks for their portfolios than investors with a growth portfolio focused on ETFs. From an ETF perspective, instead of looking for undervalued companies to invest in, you'll be looking for countries, sectors and markets.
Mistake #2: Investing in actively managed ETFs. When you invest in actively managed ETFs, you may be paying a premium for an arms-length ETF supplier (the company that “manufacturers” the ETF and makes it available on the market) to select securities that they believe will outperform their chosen benchmark. We believe a better approach is to invest in passively managed ETFs—ones that simply work to replicate the benchmark’s performance—and then actively manage the entire portfolio to achieve better growth. That way you can apply a respected, disciplined approach, such as the core-satellite approach we use with our Adaptive Global ETF strategy, across your entire portfolio.
Mistake #3: Ignoring the rest of the world. It’s easier to be a cowboy on familiar turf. Because you aren’t investing in blue chip, dividend-paying, household-name companies, you may feel a little lost. This, not surprisingly, may lead you to seek some measure of comfort and familiarity by investing close to home. That’s a mistake because North America and Europe aren’t the hotbeds of innovation they once were. Since the 1980s, China, India and other emerging economies have become the growth powerhouses, and you ignore a global strategy at the risk of compromising your portfolio performance. (Of course, these economies are also quite volatile, so you’ll want to ensure you’re balancing risk and return by closely monitoring, actively managing and properly diversifying your portfolio.)
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How can Bellwether help?
If you’re in growth-mode, chances are you’re busy. It’s not that you couldn’t do-it-yourself. It’s more a matter of whether you have the time to do it right. And it’s more than just investment management. Do you have enough insurance? Will you be able to afford to send the kids to university? What do you need in your will? Are you paying too much tax? How does your business or investment property fit into the picture? As the questions pile up, so does the stress.
Bellwether's diverse team of portfolio managers and family wealth advisors ensures families with big dreams can achieve their financial and life goals without losing sleep. We offer tailored portfolio management and holistic financial planning services all in one place—an approach that takes care of the day-to-day details of life so you’re free to enjoy living it.
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