Is growth the best strategy for an early retirement?
Retirement strategies can be a little dull, right? In reality, with a sensible approach an investor can close the retirement gap by taking on a little more risk.
Today, I'm going to contest a widely-accepted retirement strategy by arguing that investors should buy growth shares to fund their golden years.
Growth isn't gambling
Growth stocks are often touted as incredibly risky, but in reality a diversified (20+) portfolio of sensibly chosen growth stocks can deliver outsized returns.
This confusion largely arises because this total return is often delivered by a few double or triple-baggers dragging up a portfolio of mediocre stocks. In the growth game, six out of 10 correct picks can lead to riches. Picking growth stocks for retirement isn't easy, but it absolutely has the potential to outperform a selection of blue-chip income funds.
The correct strategy can offer an outsized risk/reward ratio that, if followed over a number of decades, should provide an adequate sample size to generate market-beating returns.
Cash and conviction
If you take only one thing away from this article, please make it this: wait until a company is cash-flow positive before buying it. You're investing for a multi-decade time period here, so when a company presents itself as God's gift, demand financial evidence. In my years as a growth analyst, very few companies get too expansive for investors before they break even, so relax and be choosy.
Further to that, only buy businesses when you have the utmost confidence in their future. You must believe the company in question will remain, or become, a big player in 10 years.
If you aren't so sure, move in double-time. Confidence in your convictions is vital. It will help you weather periods of share price volatility, of which there will be many if you follow this strategy.
Take Monster Energy, for example, one of the prominent growth success stories in recent years. In the 20 years to 2015, the company compounded growth at a rate of 41.6% p.a, for a 105,000% share price gain.
That might sound like a sweet ride, but in reality it was a gut-wrenching roller coaster for shareholders who saw the share price plunge on many occasions, sometimes up to magnitudes of 80% over a two-year period.
Imagine how many guys are propping up the bar right now, ruing their decision to panic-sell.. "If I hadn't ditched Monster, I'd be rich, man..." Don't be that guy. Have belief in your ideas.
The market can, and will, undervalue your favourite company for years at a time. To circumvent disaster, I advise you heed the sage words of John Maynard Keynes: "The market can stay irrational longer than you can stay solvent."
If you need to retire next year and the market decides to crash, you could find your growth stocks in big trouble. To make this strategy work, I advise you gradually transition to income-generating assets way before you retire. A buffer of 10 years should suffice. The safest bet is to slowly switch towards a majority of low-risk income generating assets by the time you are 55-60.
Finally, tread carefully when searching for high yields. Aim to achieve your desired income with 4%-5% target yield in mind. Any higher could mean a cut would be likely and, at this stage, taking that risk off the table is key.
A lot of investors dream of retiring with a million in the bank and I believe this growth strategy, if executed correctly, could help you reach that goal.
Of course, achieving a comfortable retirement is far more complicated to be covered in one article. With that in mind, The Motley Fool has designed a guide full of actionable tips to help you grow your pension pot, control dealing costs and, most importantly, find the next Monster Energy.
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