Growth of Capital

Capital Appreciation

What is Capital Appreciation?

Capital appreciation refers to the increase in the price or value of assets since their date of purchase.  Put simply, it is the difference between the purchase price (cost basis) and market price (current price) of an investment.

For example, an investor buys 100 shares of a stock at $50, for the cost of $5,000.  If that stock rises in price to $75, he/she would have a 50% return ($2,500 profit) from capital appreciation. 

In addition to stocks, the capital appreciation investment strategy is used in a variety of assets, such as exchange traded funds (ETFs), mutual funds, commodities, real estate, and collectibles.  When such assets are sold, the profit is called a capital gain.

Why Investors Utilize a Capital Appreciation Strategy?

When successful, a capital appreciation strategy allows investors to benefit from above-average market returns.  For example, since 2006, one of the best performing capital appreciation mutual funds had an average annualized return of 14.52% compared to the 10.89% return of the S&P 500.  At first glance that might not seem like a big difference but if you invested $100,000 in the capital appreciation fund, it would be worth $764,223, versus $471,396 if you invested the S&P 500.

Capital Appreciation vs. Income Investing

The objective for the capital appreciation strategy is to invest in assets with the expectation they will increase in value. This strategy has a high growth objective and therefore assumes a higher level of risk.  

Due to this increased risk, younger investors often adopt the capital appreciation strategy.  Younger investors have jobs and earn salaries to pay for their day-to-day expenses.  Therefore, they can tolerate more investment risk in hopes of producing outsized returns.

Older investors, especially those that are retired, tend to shy away from the capital appreciation strategy and instead focus on income investing.  That’s because retirees are more risk averse.  They no longer receive paychecks from their employers and are reliant on the capital they’ve saved throughout the years to generate income.  

Income investing is an investment strategy that is centered on building a portfolio that generates a regular, dependable stream of income, which is paid out as a result of owning an asset.  This income can be in the form of dividends, bond yields, rent, and interest payments.

However, it’s important to note capital appreciation and income investing aren’t exclusive to younger and older investors.  People of all ages diversify their portfolios to incorporate both strategies.  For example, there are growth stocks that pay dividends and the value of rental properties appreciates over time. Therefore, when choosing between these strategies, investors must decide what their risk tolerance is, what their investment goals are, and what their time horizon is. 

PROS and CONS for Capital Appreciation Investing

PROS

  • Capital appreciation investments funds have historically beat the S&P-500 
  • A long-term approach benefits from deferred tax liabilities, with an investor only taxed when they realize the gain

CONS

  • Investments are generally higher risk with a weighting towards growth, which can lead to higher volatility
  • There is no guarantee of returns compared to income-generating investments, which is why a longer time horizon is important

How To Invest In Capital Appreciation 

The key to outperformance using a capital appreciation strategy is rigorous analysis, research, and diversification. Therefore, a great way to benefit from capital appreciation strategies from stocks is through the use of ETFs or mutual funds focused on this approach. For other assets, it’s recommended to seek out advice from trusted and experienced advisors.  A simple search on Magnifi indicates numerous ways for investors to access capital appreciation strategies.

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The information and data are as of the September 7, 2021 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi. 

This material is provided for informational purposes only and should not be construed as individualized investment advice or an offer or solicitation to buy or sell securities tailored to your needs. This information covers investment and market activity, industry or sector trends, or other broad-based economic or market conditions and should not be construed as investment research or advice. Investors are urged to consult with their financial advisors before buying or selling any securities. Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. Past performance is no guarantee of future results. This content may not be reproduced or distributed to any person in whole or in part without the prior written consent of Magnifi. As a technology company, Magnifi provides access to tools and will be compensated for providing such access. Magnifi does not provide broker-dealer or custodial services.

Growth Investing

What is Growth Investing?

We’ve all heard of the FAANG stocks (Facebook, Amazon, Apple, Netflix, and Google) as examples of hyper-growth stocks, but opportunities in growth extend well beyond just technology.

Growth investing is a strategy that focuses on stocks that are growing their earnings and revenue at a higher rate than their respective sector and the overall market. This growth is expected to continue for the foreseeable future but there are no guarantees.

These companies are often at the forefront of emerging trends, are working to solve a significant issue, or have simply developed a better “mousetrap.” Take for instance Home Depot, which opened in 1978 and has grown into one of the largest companies in the world by offering customers a wide variety of merchandise at lower prices and with a highly trained staff. Or Netflix, which in 2007 launched a streaming service, thus ending the need for physical video/DVD rental companies.

History has shown us that the most successful growth stocks are younger companies boasting meaningful increases in quarterly/annual earnings per share, with new products/services that change our everyday lives. When it comes to identifying the best growth stocks, it’s best to focus on those companies with quarterly earnings per share growth of at least 20%, though this can be more difficult to find consistently in the large-cap space.

For investors, growth investing opportunities span across all industries. However, the most favorable have typically been Medical/Biotech, Consumer/Retail, Leisure/Entertainment, and Technology/Computer/Software. The true leaders can command triple-digit earnings multiples and offer quadruple-digit returns for those fortunate to uncover the winners early, with investing in the growth arena being a never-ending treasure hunt. This is why many investors choose to invest in growth stocks through exchange-traded funds (ETFs). ETFs make it easier for investors to have exposure to baskets of growth stocks based on particular industries and the market capitalization of the companies (small-cap, mid-cap, and large-cap).

Why Invest in Growth?

Growth stocks are attractive to investors because they offer the potential for outsized returns. For example, from 2010 – 2020, growth stocks rallied 372% compared to the S&P 500’s 297% gain. Over a larger time-frame from 1926 to 2017, Large-Cap Growth has returned 9.7% annualized, which is exceptional given that 1930-1950 was a lost decade for the market, as was 1972-1982, with minimal upside progress and violent secular bear markets.

Rather than looking for profits in the form of dividends from large, mature, less volatile companies, growth investors are searching for profits through capital appreciation. Capital appreciation is the rise in the asset’s (in the case a stock) price. Most growth stocks don’t pay dividends because they are still unprofitable or they reinvest their profits in order to develop newer and better technologies.

This is why growth stocks tend to outperform in bull markets. Investors have abundant confidence during bull markets and are willing to take on more risk investing in smaller emerging companies. However in bear markets, growth stocks tend to underperform as investors are more likely to be risk averse and often invest in more stable assets such as blue chip stocks, bonds, or gold.

Growth Investing vs. Value Investing

Value investing is an investment strategy based on fundamental analysis. While growth investors look for stocks with significant earnings and revenue growth, value investors instead search for stocks that have fallen out of favor and are undervalued in the marketplace. The expectation is that the prices of value stocks will appreciate when other investors recognize their true value.

Value investing is considered less risky than growth investing. That’s because value stocks are often larger, much more established, less volatile, and provide a source of income through dividends, regardless of capital appreciation.

Value stocks tend to outperform growth stocks during bear markets. For example, during the dot com bubble in the late 1990s, growth stocks significantly outperformed value stocks. However, when the recession hit in 2001, value stocks outperformed growth stocks.

Therefore, long-term investors often utilize both strategies, growth and value, to create a balanced portfolio. This allows them to realize returns throughout periods of economic expansion and contraction.

How to Invest in Growth

Though opportunities are abundant in the growth arena, only the most lucrative companies will survive, and competition is cutthroat. Given the difficulty in picking the winners, the best solution is investing through Growth-focused ETFs and mutual funds, which offer the following:

  • Diversification: protecting one’s self from a couple of disastrous ideas, and improving the odds of latching onto a massive winner.
  • Market-leading returns: with growth fund managers focused on capital appreciation and spending heavily on state-of-the-art research, and they can latch onto emerging trends and technologies early.
  • Fund management: skilled experts identify the best opportunities, and employ the best time-tested strategies to enter and exit positions. This takes the emotion out of the equation, which is what causes most individual investors to consistently underperform the market, even if they do uncover great companies

For those interested in Growth Investing, and potentially participating in the next major story like the massive FAANG outperformance in the past decade, a simple search on Magnifi displays numerous ways for investors to gain access to growth with low fees.

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Magnifi is changing the way we shop for investments, with the world’s first semantic search engine for finance that helps users discover, compare and buy investment products such as ETFs, mutual funds and stocks. Open a Magnifi investment account today.

The information and data are as of the August 12, 2021 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi.

This material is provided for informational purposes only and should not be construed as individualized investment advice or an offer or solicitation to buy or sell securities tailored to your needs. This information covers investment and market activity, industry or sector trends, or other broad-based economic or market conditions and should not be construed as investment research or advice. Investors are urged to consult with their financial advisors before buying or selling any securities. Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. Past performance is no guarantee of future results. This content may not be reproduced or distributed to any person in whole or in part without the prior written consent of Magnifi. As a technology company, Magnifi provides access to tools and will be compensated for providing such access. Magnifi does not provide broker-dealer or custodial services.

Asia

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“Made in China” is a phrase we all know well, but American shopping aisles bursting with “Made in China” goods are becoming more and more a thing of the past, especially as the depth and breadth of Asia’s economies develop. The truth is, this is not just a China story anymore— it’s a story of a new Asia bursting with emerging economies, high-tech industry, and a growing middle class.

Consider that the United Nations estimates that as of July 2020, Asia as a whole has a population of more than 4 billion. That amounts to about 60 percent of the world’s current population.

Asia is growing and its enormous population is buying more and more of its own stuff than ever before. It is estimated that “Asian-Pacific (APAC) countries will have seen a growth in their middle-classes by over 500 percent in the 20 years up to 2030.” This increased buying power will be nothing short of transformative, especially compared with 2 percent growth in Europe and a decline of nearly 5 percent in America over the same period.  

Asia’s global output is up 26% from the early 2000s and, according to McKinsey and Company, “Asia is on track to top 50% of global GDP by 2014 and drive 40 percent of world’s consumption.”

This growth isn’t just thanks to China, but small and medium-sized countries throughout the region, as well. Asian business hubs stretch from Singapore to Jakarta, Kuala Lumpur and Manila. In fact, according to an analysis by The Financial Times, Indonesia is on pace to overtake the world’s sixth-largest economy, Russia, by 2023. 

Not to mention, Asian exports are not reliant on the United States. Moreover, China’s total exports amount to 40% of the world’s consumption. Although exports to the United States fell by more than 8%, they remained about the same from 2018 to 2019. In other words, China was able to compensate for the drop in exports to the US by exporting more to the rest of the world. 

Yes, the region is seeing some political instability in 2020, with protests and crackdowns roiling Hong Kong and other parts of China. But, given the growth that’s happening alongside this, it will take more than that to slow down the Asian expansion.

What’s Changing in Asia’s Markets?

China is no longer simply making the cheap plastic toys that it may have once been known for. Rather, its products are increasingly high-tech and sophisticated. 

That means two things: The first is that in China, wages are on the rise. The second is that there is a new space globally for low-cost manufacturing that once belonged solely to China. 

Vietnam’s exports are up 96% since 2015, a surge led by the export of low-cost textiles. (It’s worth noting that Vietnam is also home to a global manufacturing base for Samsung.)

In India, Prime Minister Narendra Modi launched the “Make in India” initiative with the goal of developing India into a manufacturing hub that is recognizable on the global scene. And it seems to be working, with India’s exports up 22.5% since 2015.   

All of that manufacturing would literally go absolutely nowhere without streamlined logistics, however. “The logistics industry accounts for 15-20% of GDP in Vietnam and is expected to grow up to 12 percent in Indonesia.” In large part, this growth is thanks to both increased investment and streamlined e-commerce. 

Why Invest in Asia?

Asia might be set to overcome the West as a center of trade and commerce, but it’s not there yet. And it’s not without challenges. Many countries that are home to emerging markets have also become home to the challenges of emerging countries.

Take infrastructure, as an example. 

Paired with challenging geography, poor roadways can devastate supply chains. But, supply chain challenges like those found in Asia can largely be overcome by technology solutions, such as Route Optimization, Predictive Alerts, AI-based forward and reverse logistics, and smart shipment sorting. Additionally, infrastructure spending is on the rise in Southeast Asia, through the formation of institutions such as the Asian Infrastructure Investment Bank and the Japan Infrastructure Fund.  

Countries like Indonesia have shown that economic growth for smaller, emerging countries is sustainable. Not only is Indonesia rich with natural resources, it is committed to specialized manufacturing including that of machinery, electronics, automotive and auto-parts. The country has slashed its “poverty rate by more than half since 1999, to 9.4% in 2019.” It’s most recent economic plan implemented in 2005 was for 20 years, broken into 5 year increments.

In all, the Asian continent, with its emerging middle class, increased focus on high-tech manufacturing, and participation by lesser-known counties, has long-term growth potential. And, with this momentum already in full swing, the future looks bright for countries across the continent.

That’s what happens when emerging markets “emerge” all the way into fully developed economies.

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Magnifi is changing the way we shop for investments, with the world’s first semantic search engine for finance that helps users discover, compare and buy investment products such as ETFs, mutual funds and stocks. Open a Magnifi investment account today.

The information and data are as of the July 29, 2020 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi. 

This material is provided for informational purposes only and should not be construed as individualized investment advice or an offer or solicitation to buy or sell securities tailored to your needs. This information covers investment and market activity, industry or sector trends, or other broad-based economic or market conditions and should not be construed as investment research or advice. Investors are urged to consult with their financial advisors before buying or selling any securities. Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. Past performance is no guarantee of future results. This content may not be reproduced or distributed to any person in whole or in part without the prior written consent of Magnifi. As a technology company, Magnifi provides access to tools and will be compensated for providing such access. Magnifi does not provide broker-dealer or custodial services.