If you want to generate market-beating returns, you need to have at least some growth stocks in your portfolio.
According to several surveys and research conducted in Australia, most investors hold cash and shares in the big four banks as their highest asset allocations. Over the long term, that's not going to get most investors a market-beating return, and they may as well invest in an index-tracking exchange traded fund (ETF) and forget about it until retirement.
Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) have enjoyed fabulous returns over the past 20 years – but that's also coincided with a period of uninterrupted growth in Australia.
While many investors are heavily focused on their fully franked dividends for income, many have lost sight of generating an overall return higher than the market as well.
Those stellar returns may be coming to an end – as all good things do.
Given their current size and market dominance, the big four banks will also struggle to generate market-beating growth – but that's where smaller, more nimble growth stocks can help.
Smaller companies can juice your returns
Just look at some of these returns over the past 10 years…
- Liver cancer treatment producer Sirtex Medical Ltd (ASX: SRX) up 1,630%
- Blood plasma group CSL Limited (ASX: CSL) up 696%
- Telco M2 Group Ltd (ASX: MTU) has soared a whopping 2,825%, but if you include dividends reinvested, the return jumps to 5,250%.
Those three aren't small companies anymore, but those returns dwarf those from the big four banks. By comparison, Westpac is up 178% and ANZ is up 129%, both including dividends reinvested.
As you can no doubt see, holding growth stocks such as the ones mentioned above can juice up the returns of your portfolio over the long-term. It's one reason why we here at the Motley Fool advocate setting aside part of your portfolio for growth stocks.
What else do I need to consider?
Now I could rattle off any number of growth stocks that have enjoyed substantial returns over the past decade, and which have a high likelihood of generating outsized returns in the next decade.
But that would also be missing a vital piece of the puzzle, and that one piece of information is – Can you buy any of them at a decent price?
Here's one example.
Domino's Pizza Enterprises Ltd (ASX: DMP) has generated strong returns over the past decade, and with the recent move into Japan could be set for another decade of strong growth. The only problem is the market wants you to pay more than $40 per share and a P/E ratio of more than 50x. I think you'll agree that that is a high price.
Now, that's ok if Domino's continues to generate double-digit growth in earnings into the foreseeable future, but any misstep could see the share price heavily sold off.
