Capital growth investment strategy is a widely accepted and followed portfolio management strategy. As the name suggest, the strategy aims at capital growth, maximizing portfolio value, over time. Before we start, here is the danger signal: capital growth strategy is a high risk investment strategy which requires great investment discipline and financial management.
A portfolio which follows capital growth strategy is mainly comprises of equities. Often more than 60 to 70 percent capital is invested in stocks, preferably growth stocks. Remaining portfolio can be constituted of low profit low risk investments such as fixed income securities, money market funds, cash, and/or precious metals like gold to limit overall portfolio risk. The exact portfolio capital allocation depends on many things like individual profit goals, risk tolerance, risk capital involved, portfolio size and investing experience.
Many times one can see capital growth portfolios which allocate more than 90 percent capital to equities. Capital growth investors often prefer small and mid-cap stocks over large cap stocks, because these show greater growth and are expected to offer increased return over time. Diversification of portfolio is important in capital growth strategy and is achieved by responsible investing in different products like stocks, options, futures, ETFs, funds, bonds, etc. Portfolios which allocate most or all of the capital to equities achieve diversification by investing in different industry stocks, different markets, using derivatives to hedge risks, and by investing in both high growth high risk stocks and low profit low risk stocks.
A capital growth investment strategy is a long-term strategy, which may or may not require periodical reassessments and rearrangements of portfolio allocations. Investable stocks are found using various growth investing tools and strategies. Active portfolio management is recommended for experience investors, to replace low performing investments with high performing ones. But remember, active management often requires greater costs.
The advantages of capital growth investment strategy involve faster increase in asset value and better chance of profit than most other investment strategies. The disadvantages include higher risk, unpredictable returns and high volatile portfolio. With capital growth strategy, market entry and exit timings are very important; and there are too many market, risk and economic factors to be considered.