Before developing a growth investment strategy, set some ground rules. Growth investing involves risk to principal. A $10,000 contribution to a large-cap mutual fund, for instance, might be worth $9,000 or less next year. Investing your last $10,000 in the hopes of realizing returns beyond Federal Deposit Insurance Corporation (FDIC) deposits is unwise. All financial planners recommend establishing an emergency fund in an insured, easily accessible account with three to six months’ worth of household income before investing. In the case of job loss or a medical emergency, that money will be readily available to help remedy what could be an otherwise crippling financial event. With an emergency fund in place, seeking growth-oriented investments to increase personal wealth bears less risk.
When investing for growth, keep in mind the old adage: don’t put all your eggs in one basket. Consider a U.S. large-cap growth mutual fund. This vehicle is already diversified to an extent. It pools your money with that of other investors worldwide to purchase shares of stock in multiple companies. A seasoned investment manager, with the assistance of a team of knowledgeable financial analysts, makes informed decisions on purchasing attractive stocks for the fund. A typical growth mutual fund may hold the stocks of more than 100 companies, many of which are household names. Some of those companies may perform well, while others may not. By spreading the risk across a multitude of common stocks, diversification lessens the risk of investing in the stock of the one company that may have a bad year, or in a worst-case scenario, having to declare bankruptcy. Mutual fund managers generally have the foresight to sell shares of a poor performer and replace them with those of a company whose prospects are brighter.
Spread the Risk Wider
A large-cap mutual fund that holds domestic stocks is a good start for a growth strategy. There are global economies that do not move in lockstep with the United States. In domestic recessionary periods, investing in countries around the world can reduce your risk of exposing all your assets to one market. An international mutual fund paired with a U.S. portfolio spreads your risk even more broadly, allowing you to capture gains globally and tempering potential downturns in the domestic market. Additionally, small- and mid-cap stocks may do well even when the U.S. economy is not firing on all cylinders. Money will always follow the companies that have innovative products and services despite the general state of the economy. Thus, choosing a fund that invests in small-, medium- and large-company stocks, along with international issues, reduces your level of risk and buffers your potential losses amid a turbulent U.S. economic climate.
Do Your Homework
Self-education is an ideal means of investigating individual companies poised for growth through innovation and sound management. Looking at the wealth of products that billions of people consume and the services they utilize every day, it’s not difficult to hone in on a stable of companies that are large, established industry stalwarts. If long-term growth is your investment objective, purchasing shares of industry leaders is a sound strategy to boost your returns and collect dividends along the way. While there is inherently more risk in stocks than in mutual funds, individual stock investing can yield far greater rewards. Consumer giants and utility companies are a good place to start searching. With the myriad of resources available, there is no shortage of information on companies that may have a new product or service coming to market. With a solid base of safe and liquid assets, layered on top with growth-oriented mutual funds, you set the foundation to grow wealth while minimizing your risk through diversification.