Understanding Long-Term Growth: Strategies for Investment Success

Defining Long-Term Growth (LTG)

Long-term growth (LTG) is an investment strategy focused on increasing a portfolio’s value over many years. LTG means investing to earn returns that beat the market over long periods, usually 10 years or more. Portfolios usually take a more aggressive approach to reach this goal by holding a higher percentage of stocks versus bonds. This strategy aims to take advantage of the stronger growth potential that stocks can offer over time.

How to Understand Long-Term Growth (LTG)

Although long-term is relative to an investors’ time horizons and individual style, generally LTG is meant to create above-market returns over a period of ten years or more.

Because of the longer time frame, LTG portfolios can be more aggressive, holding a larger percentage of stocks versus fixed-income products such as bonds. Whereas an intermediate-term balanced fund might have 60% stocks to 40% bonds, a LTG fund might have 80% stocks and 20% bonds.

LTG is meant to do exactly what it says—deliver portfolio growth over time. The catch is that the growth can be uneven. A LTG portfolio may underperform the market in the first years and then outperform later, or vice versa.

This is a problem for investors in a LTG fund. Even if a fund delivers good average growth over a decade, for example, the performance year to year will vary. Therefore, investors can have very different outcomes depending on when they buy into the fund and how long they hold. Timing investments is, of course, a problem facing every market participant and not just LTG fund investors.

The Relationship Between Long-Term Growth (LTG) and Value Investing

The core advantage to LTG is that short-term price fluctuations are not of major concern. Similarly, many value investors focus on stocks with LTG potential, searching for companies that are relatively inexpensive with strong fundamentals. Then they simply wait until they increase in value as the market catches on to their fundamental strength before selling.

Individual investors often benefit from a LTG focus, and that may lead them toward value investing as a strategy. However, LTG simply refers to the longer period over which returns are sought, not a particular investment style such as value investing.

Long-term funds are just as likely to buy the market through various indexing products as they are to seek out undervalued stocks. Value investing, in particular, can be difficult for fund managers to stick to for the long term.

Although investors in LTG funds are told to expect a decent average return over multiple years, less patient investors are free to pull out unless the fund has a lock-up period—something that is usually found in hedge or private funds. If a typical LTG fund has too many mediocre years, then capital will start to leave as investors seek better market returns. This can force a fund to prematurely trim holdings before the market value catches up with the intrinsic value of the stocks.