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Growth Investing

Buy and hold promising companies

Growth investors look for companies with above-average opportunities to grow; companies that may be "the next big thing." There's a strategy for that.

When you invest for growth, you buy shares of promising, often small or mid-sized companies, or the funds that invest in those companies. Some investors prefer a combination of individual stocks and stock funds. Growth investors choose their investments because they expect the stock's prices to increase significantly over time. Then you hold onto them.

Whenever you have your eye on bigger returns, remember that goes hand in hand with more risk. There's no guarantee that taking a bigger risk will automatically lead to better returns (or to positive returns at all).

Growth in share value is called price appreciation, and some of the funds you consider may be called price appreciation funds. Others may be called growth funds or aggressive growth funds. Index funds and ETFs linked to indexes that focus on small-company stocks, like the Russell 2000, are also classified as growth funds.

Can you handle some heat?

Most growth stocks don't pay dividends. The companies prefer to reinvest their profits to build and expand. That's intended to fuel growth. They also tend to be more volatile than larger, more established companies with more resources. So when you invest for growth you need a strong constitution to ride out some possible stomach-lurching price drops.

The primary risk with a growth strategy is that success is never predictable even if you do everything right. The first company to market with a new product or service isn't always the one that becomes the leader. A major downturn in the economy can force young companies into failure - or into the talons of a vulture fund that takes it private.

A little heat may lead to bigger gains

The younger you are, the more risk you might be able to afford to take by concentrating on a growth strategy. There's time to recover from downturns (but of course no guarantee of recovery). And the larger your investment portfolio, the more you may be able to afford to put at risk to have the potential for larger-than-average gains. But what's common wisdom may not be right for you - consider how much risk you're comfortable taking with your own timeline and financial situation.

One thing about a growth strategy - or any strategy, for that matter - is that it's not an all-or-nothing proposition. You can define it for yourself. You can allocate any percentage of your overall portfolio to growth that you're comfortable with. You can define growth as a price increase of 15 percent, or half that amount, or double it. You can combine a quest for growth with a parallel quest for income. It's your decision.