Simple, in principle at least. The reality is more complicated. Unlike certain approaches to investing for income – where reliable, albeit expensive, income streams can be secured by lending to governments, for instance – the pursuit of capital growth is especially unpredictable.
The value of any asset can appreciate over time, be they company shares, bonds or property, but their price on any given day is at the whim of the markets. To borrow an old idiom, the value of something is only what someone else will pay for it.
If you are looking to grow your savings over many years, perhaps over decades, day-to-day market gyrations are less relevant. The longer your investment horizon, the more willing you might be to accept uncertainty, and even embrace it, in return for potential capital gains.
Why invest for growth?
A common aspiration is to try and grow the money set aside for tomorrow from your income today, and by as much as you can. Your goal might be to have more savings when you reach retirement, or perhaps to build up a war chest for future aspirations or contingencies.
Patience can pay off. It may take many years before the value of an asset realises its potential – and there’s no guarantee it ever will – but there is a close relationship between risk and reward over the long run. In general, the more risk you take, the more your investment could rise (or fall) in value.
It is worth remembering that if you are investing for the long term, taking too little risk could leave you without enough money in the future. If the returns you realise on your savings and investments don’t keep pace with the rising price of goods and services, or inflation, they will ultimately be worth less in real terms when you come to need them.
Three approaches for long-term growth
Any asset whose potential is not reflected in its current price is an opportunity for a long-term investor who can overlook short-term ﬂuctuations in asset prices and aim for capital growth over time.
Traditionally, investors focused on pursuing capital growth have looked to company shares, which tend to offer higher growth potential than assets considered ‘safer’, like UK or US government bonds. After all, as a shareholder you can directly benefit from a company’s growth and profits, and there is no limit on how high a company’s share price can rise.
There is a wide range of approaches to investing in company shares. Here are three that can deliver long-term capital growth for investors if they are successful.
1. Fast-growing companies
One approach to investing for long-term growth is to seek out promising companies that are either growing quickly, or have the potential to in the future, perhaps because of ideas they are developing. Such companies can often be in innovative sectors, like technology, where the chance of commercial failure is high, but as are the rewards of success.
2. Out-of-favour companies
The potential long-term gains can be great where companies are currently out of favour with investors, but whose share prices could rise significantly in the future if their fortunes improve. This approach, known as ‘recovery’ investing, can require a great deal of patience, in waiting for companies to turnaround, as well as an acceptance that success may never return.
3. Emerging markets
Finally, growth-focused investors can look to those economies that are expanding towards an advanced stage of development. These so-called emerging markets can offer exciting investment opportunities for companies, and their shareholders, where they can tap into economic growth that is generally stronger than in more developed economies.
Of course, whenever you invest money there is always the chance that you may not get back the original amount you invest. The risks of short-term losses can be greater when you’re pursuing long-term growth. Emerging markets come with particular risks, for instance, since they are generally more sensitive to economic and political factors, and investments are less easily bought and sold.
Investing through funds, which combine a range of assets into a single investment, could help you achieve a better balance of risk and reward. Fund managers will pursue a specific objective, such as delivering long-term capital growth, over a given period by selecting and managing a combination of assets.
However, while each fund aims to achieve its objective, remember that there can be no guarantee since the value of investments will fluctuate over time.
Please remember that past performance is not a guide to future performance. The value of the fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested.
The views expressed in this document should not be taken as a recommendation, advice or forecast. We are not able to give any financial advice. If you’re at all unsure about the suitability of your investment, please speak to a financial adviser.