Growth investing: What it is and how to build a high-growth portfolio

Main advantages of growth investing

Growth investing succeeds when it targets companies with strong growth potential—firms that are often leading innovation or expanding rapidly. These companies tend to benefit from compounding returns, as reinvested earnings generate more capital to fuel future expansion.

Here are three factors that make growth investing an attractive strategy:

Strong earnings growth potential

Growth companies typically operate in industries with high potential for future earnings. Whether it's a tech firm launching a revolutionary product or a healthcare company developing cutting-edge treatments, these businesses often demonstrate above-average growth compared to their peers.

Investors try to take advantage of the long-term potential of these companies as they expand their market share and profitability.

Compounding returns over time

One of the key advantages of growth investing is the compounding effect. As companies reinvest profits into their own operations, they often accelerate their growth. This, in turn, increases their intrinsic value and stock price over time, allowing investors to benefit from exponential gains.

Capitalising on market trends and innovation

Growth stocks often thrive in sectors that are at the forefront of market trends and innovation. These companies are often disruptors—introducing new technologies, services, or business models that shake up traditional industries. This ability to innovate and adapt positions them for continued expansion, especially in fast-moving industries like technology and renewable energy.

Key growth investing strategies for a high-growth portfolio

To succeed in growth investing, it's essential to use smart strategies that help you spot companies with solid growth potential while managing your risk.

Here are some valuable strategies for building a high-growth portfolio:

Focus on sectors with growth potential

Growth stocks tend to emerge in sectors that are either rapidly expanding or going through significant change. Industries like technology, healthcare, and consumer discretionary are home to companies that often have innovative products, scalable business models, and increasing demand.

For example, areas like renewable energy or cloud computing have been showing strong growth thanks to technological advances and consumer behaviour shifts.

By concentrating on these sectors, you can take advantage of companies that are leading the way in industry innovation or benefiting from long-term trends—factors that can drive substantial stock price growth.

Leverage growth stock screeners

An efficient way to pursue growth investing is by using stock screeners, which help you narrow down companies that meet specific growth criteria like revenue growth, earnings per share (EPS) growth, and return on equity (ROE).

Most screeners also allow you to target sectors with high growth potential, making it easier to find substantial opportunities.

With these tools, you can systematically discover emerging companies that might otherwise fly under the radar, giving you a structured way to build your growth-focused portfolio.

Seek out companies with sustainable advantages

Successful growth companies often have something special that gives them a lasting edge over competitors—what's called a sustainable competitive advantage or economic moat. This could be anything from cutting-edge technology to high brand loyalty or barriers to entry in their market.

Investing in companies with these advantages allows you to tap into businesses that are likely to grow and maintain their leadership.

Take Tesla as an example. Its dominance in the electric vehicle market and its innovation in battery technology and renewable energy provide it a unique competitive advantage, making it an attractive option for growth investors.

Apply dollar-cost averaging to manage volatility

Growth stocks can be pretty volatile, with prices sometimes fluctuating wildly over short periods. One way to manage this volatility while still building a position in high-growth companies is through dollar-cost averaging.

This strategy involves investing a fixed amount of money at regular intervals, regardless of the stock's price at that time. Over time, it helps smooth out the effects of short-term market swings and can lower your average purchase price.

For long-term investors, dollar-cost averaging can be an effective way to gradually build exposure to high-potential stocks while reducing the risks associated with market timing.

Diversify across multiple growth stocks

While growth stocks can potentially generate high returns, they often come with greater risk. That's why it's wise to diversify your investments across multiple growth companies and sectors. When you spread your investments across different industries or markets, you reduce the risk associated with any single company's performance.

Diversifying your portfolio helps you participate in the growth of various industries while mitigating the impact of individual setbacks.

Growth vs. value investing

The main difference between growth and value investing {link to value investing guide} lies in their objectives and how they view a company's current price relative to its potential.

Growth investors prioritise future potential, often paying a premium for stocks they believe will experience rapid earnings or revenue growth. These stocks are generally more expensive based on standard valuation metrics, such as the price-to-earnings (P/E) ratio, because investors are betting on the company's future success.

On the other hand, value investors focus on buying stocks that are trading below their intrinsic value, essentially looking for bargains. These companies may be temporarily out of favour with the market due to short-term setbacks but are considered fundamentally strong.

In essence, growth investors are willing to pay more for future potential, while value investors aim to buy undervalued companies with a margin of safety.

Market conditions favouring growth vs. value

Growth and value stocks perform differently depending on market conditions. Growth stocks tend to excel during periods of economic expansion or in bull markets, where optimism drives stock prices higher. In these environments, investors are more willing to pay higher prices for companies they believe will deliver strong future earnings growth.

Conversely, value stocks often outperform during market downturns or times of economic uncertainty. In such periods, investors seek stability and lower-risk investments, making value stocks—those trading below their intrinsic worth—more attractive.

Historically, value investing has provided a more consistent return during volatile times, while growth investing tends to shine when markets are booming.

Choosing between growth and value depends mainly on personal investment goals, risk tolerance, and market conditions. Many investors blend both strategies to balance the potential for high returns with the need for stability.

Growth vs. dividend investing

Growth investing focusses on companies that reinvest profits to fuel expansion, with the goal of increasing the stock's value over time. In contrast, dividend investing targets businesses that regularly return profits to shareholders through dividends, offering a more immediate income stream.

Growth investors typically search for companies in fast-growing sectors, like technology, where reinvesting earnings drives further development instead of paying out dividends. This strategy is ideal for those looking for long-term capital gains.

On the other hand, dividend investors prioritise reliable income from well-established companies in stable industries—such as utilities or consumer goods—that consistently pay dividends. These businesses tend to offer lower risk and more predictable returns.

Ultimately, growth investing focusses on stock price appreciation, while dividend investing provides steady income, catering to different financial goals and risk appetites.

Risks of growth investing

Growth investing offers the potential for high returns, but it also comes with several significant risks that investors need to be aware of:

Market volatility

Growth stocks tend to be more volatile compared to value or income stocks. Because these companies reinvest heavily in expansion, their stock prices can experience sharp fluctuations, especially during market downturns or periods of economic uncertainty. This volatility can lead to sudden and significant losses for investors if the market shifts unfavourably.

Overvaluation

Growth stocks are often priced based on high expectations of future earnings. This can lead to overvaluation, where the stock price becomes inflated beyond what the company's fundamentals can justify.

If a company fails to meet these growth expectations, its stock price can drop sharply, leaving investors vulnerable to substantial losses. This is particularly risky in speculative industries where hype can outpace actual performance.

Sector concentration

Growth investing is frequently concentrated in sectors such as technology, healthcare, or consumer discretionary, where rapid innovation drives expansion. While these sectors can deliver strong growth, they are also susceptible to industry-specific risks.

For example, regulatory changes, technological disruptions, or a slowdown in innovation can cause significant losses across an entire sector, putting investors at risk.

Profit uncertainty

Growth companies often reinvest profits into further expansion, meaning they may not be profitable for extended periods. Investors are betting on future success, but if the business model fails or if growth slows unexpectedly, there is a risk that the company will never reach profitability, leaving investors with losses.

Conclusion: Why growth investing is worth considering

Growth investing continues to be an attractive strategy, especially for those who are willing to take on a bit more risk in exchange for the chance at bigger rewards. By focussing on innovative companies that show strong earnings growth, investors have been able to tap into significant gains in fast-moving sectors like technology and healthcare.

Of course, growth investing isn't without its challenges—volatility and overvaluation are real concerns. However, for those with a higher risk tolerance and a long-term outlook, the potential for strong returns makes it a strategy worth considering.