What does long-term growth (LTG) mean?
Long Term Growth (LTG) is an investment strategy that aims to increase the value of a portfolio over a period of several years. Although the long term is relative to time horizons and the individual style of investors, long term growth is generally expected to generate above market returns over a period of ten years or more. Because of the longer duration, long-term growth portfolios can be more aggressive in holding a higher percentage of stocks compared to fixed income products like bonds. While a medium term balanced fund could have 60% stocks to 40%, a long term growth fund could have 80% stocks and 20% bonds.
Understanding long-term growth (LTG)
Long-term growth is supposed to do exactly what it says: to grow the portfolio over time. The catch is that growth can be uneven. A long-term growth portfolio can underperform the market in the first few years, then outperform later, or vice versa. This is a problem for investors in a long-term growth fund. Even if a fund shows good average growth over a decade, for example, the performance from year to year will vary. As a result, investors can have very different results depending on when they buy the fund and how long they hold. Investing over time is, of course, a problem faced by all market participants, not just long-term growth fund investors.
Long-term growth (LTG) and value investing
The main advantage of long-term growth is that short-term price fluctuations are not a major concern. Likewise, many value-oriented investors focus on stocks with long-term growth potential, looking for relatively inexpensive companies with solid fundamentals. Then they simply wait until they increase in value when the market reaches their fundamental strength before selling. Individual investors often benefit from a long-term growth objective, which can lead them to invest in value as a strategy. Long-term growth, however, simply refers to the longer period over which returns are sought, and not to 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 undervalued stocks. Investing in value in particular can be difficult for fund managers to stick to over the long term. Although investors in long-term growth funds are expected to expect a decent average return over several years, less patient investors are free to opt out unless the fund has a lock-in period – which is generally found in hedge or private funds. If a typical long-term growth fund has too many mediocre years, capital will start to go away as investors seek better market returns. This may require a fund to prematurely reduce its holdings before the market value catches up with the intrinsic value of the shares.