Growth investing bets on a specific thing — that a company's future earnings will expand fast enough to justify paying a premium for it today.
The Approach
Growth investors target companies with above-market revenue and earnings expansion — often reinvesting profits into the business rather than paying dividends, since growth-stage capital typically compounds faster inside the company than as a shareholder payout. This reinvestment focus is exactly why growth stocks typically carry a higher P/E ratio than the broader market — investors are real-time paying more per current dollar of earnings, betting those earnings will be meaningfully larger in a few years.
One thing worth checking: Growth investing's risk concentrates precisely where its reward does — if earnings growth disappoints even slightly versus what the premium valuation assumed, the stock can fall sharply, since a high P/E has limited room for disappointment already priced in.
A Younger Investor With a Long Time Horizon: Growth investing's volatility is easier to absorb with decades to recover from a downturn.
Someone Nearing Retirement: Growth stocks' earnings-disappointment risk and lack of dividend income argue for a smaller allocation here.
Approach Growth Investing the Way
- Check whether a stock's earnings growth is actually accelerating, not just historically fast.
- Understand a high P/E leaves limited room for disappointment.
- Size your allocation to match your actual time horizon.
See value investing strategy and growth stocks vs. value stocks for the point of comparison.
