What do growth-style managers look for?

Above-average earnings growth. Generally, growth-style managers look to buy companies with strong competitive positions or expanding market opportunities. Companies with these characteristics are often poised for above-average profits or earnings growth. Although profits can be paid out to shareholders, many growth companies reinvest the money back into the company to further strengthen its competitive position or expand into new markets.

Long-term growth trends. Growth managers also look for companies that are well positioned to capitalize on long-term growth trends that may drive earnings higher.

Benefits of a growth strategy

Return potential. Growth-style investing tends to be more aggressive than value-style investing and could potentially offer stronger performance during healthy economic environments.

Diversification. Growth stocks and their counterpart, value stocks, are often in favor in different economic environments and at different points in the business cycle. By combining both growth- and value-oriented investments, you can better diversify your overall portfolio.

How risky are growth funds?

Growth stocks can be volatile and typically are associated with a higher level of risk. Because these stocks often trade at higher valuations, if a company experiences a setback or if earnings don’t meet expectations, the company’s stock price has the potential to take a harder fall.