Growth is the most important thing on the minds of many stock market investors, but not all strategies are equal. Most people's returns don't match whatever number is published for the S&P 500 or NASDAQ over certain periods. You should also be able to beat the market indexes over the long-term in your 401(k) or IRA. If you want to stimulate growth and unlock the magic of the market, consider these four investment approaches.
1. Hold for the long term
Too many investors are their own worst enemy. People get nervous when the market falls, so they sell stocks that have already lost value. That's exactly how you lock in your losses and miss out on the eventual bull market recovery. Over the entire history of capital markets, equities have always returned to long-term growth as the global economy expands. That's no guarantee of future performance, but it's a strong fundamental indicator.
It's fine to make some modest adjustments to your allocation as market conditions change. Those adjustments could include rebalancing or a slight rotation based changing valuations. For the most part, though, you want to come up with a long-term plan and stick to your guns. Let your winners keep winning.
Volatility is a necessary evil in stock market investing, and the stocks that deliver the most growth tend to endure more volatility along the way. It's impossible to know exactly which days a stock will rise and fall, but the gains are going to outweigh the losses for a well-allocated portfolio. The best way to unlock returns is to stay invested for all the days that your stocks grow.
2. Go beyond index investing
Index investing is great for most people, and it's only a good idea to embrace a more active strategy if you do so responsibly. That said, you can't beat the market if you only hold index funds. Technically, you can't even quite match the market with index funds, because you incur taxes, fees, and trading costs, even if they're minuscule.
Over the long run, the average rate of return for index funds has been around 8% to 10%. There's nothing wrong with that return, but if you want to get more out of the hard-earned savings that you put to work, you have to go beyond indexes and stay disciplined with stock picking.
3. Invest in megatrends
Exposing your investments to emerging high-growth economic trends is a great way to deliver spectacular returns. Some industries are going to expand rapidly, and some geographic regions are going to outpace others. The companies spearheading those trends are going to benefit with higher revenues and profits, and that should drive the value of their stocks higher over the long term.
Software is one of the most rapidly evolving parts of the new economy. Artificial intelligence, automation, data analytics, and cybersecurity are industries that are almost guaranteed to grow over the next decades. Healthcare is also transforming through genomics, telehealth, biotech, robotics, and nanotechnology. Emerging economies have swelling middle classes that will create growing demand for the goods and services that have been more common in developed nations for years. These are some of the most prominent megatrends that will catalyze economic growth moving forward.
Investors can capitalize by purchasing stocks of disruptive companies that will become future leaders. Alternatively, you can use niche-focused exchange-traded funds (ETFs) to invest across all of the stocks in these categories. That allows you to bet on the trend rather than any single company. Either way, this strategy should create more upside than indexing or holding mature companies.
4. Learn from factor investing
Factor investing and smart beta aren't quite the hot topics they were a few years ago. The extended bull market that favored growth can have that effect. There are long-term studies that suggest factor investing can be a reliable way to outperform the market, though, and the logic still holds up.
Factors are different characteristics of stocks that are shown to result in higher returns. For example, cheap stocks don't have as much growth factored into their price, so they perform better, all else equal. Smaller companies often have more growth opportunities than giants that already saturate their target markets. Profitable companies provide more stability than unprofitable ones, so they are less likely to flame out or lose value. Companies with strong balance sheets and stable cash flows are less prone to steep losses. Stocks with momentum deliver gains because they have a disproportionate share of investor interest.
ETFs with factor and smart beta focuses are probably the best tools for this strategy. It can be a lot of work to identify a full allocation of stocks that have these characteristics, and it's even more work to manage that portfolio over time. Factor investing is a semi-passive strategy, so you can outsource that management at relatively low expense ratios, saving yourself the headache, annual taxes, and trading fees incurred with active management.