Growth stocks are by no means a large part of my portfolio. Buying these traditionally represents a much riskier strategy than simply investing in value or income shares.
But that’s not to say I don’t invest in growth stocks. I’m often on the lookout for companies than can take advantage of long-term trends and outperform the market in the long run.
Cathie Wood is one of the most famous stock pickers, investing in innovative growth shares. So can I invest like Wood to become a millionaire?
It’s a risky business
Many new businesses fail. It’s not just new restaurants and cafes we see open on our high streets and close a year late. Listed stocks are much the same. The promised growth doesn’t always happen and investors lose money.
Having recently launched my own soft drinks company, I’m very aware of the challenges that face new businesses. I have a lot of confidence in my business, but I recognise that it could take years for us to turn a profit.
And that’s the risk we take when we invest in growth stocks. It becomes all about investing in an expectation. And, for whatever reason, that expectation might not be realised.
Cathie Wood’s strategy
Wood is the CEO of ARK Invest, an asset manager that invests in disruptive innovation — all growth stocks. In 2020, Wood was named best stock-picker of the year by Bloomberg News editor-in-chief emeritus Matthew A Winkler.
The US-based investor focuses on high-impact innovations, such as artificial intelligence, DNA sequencing, robotics, energy storage, and blockchain technology. These innovations are seen as being key to the development of low-cost and implementable technology.
The cost-cutting element is key because it encourages quick adoption. Innovations that create large-scale efficiencies often generate their own momentum.
And while Warren Buffett invests for the very long term, Wood’s investment timeline is five years. This, she contends, maximises investor returns on these disruptive innovators.
Can it pay off?
In 2020, all six ARK ETFs notched returns greater than 100% — while the S&P 500 grew 16%. There were several reasons why her portfolio’s outperformed in 2020. For one, with normal life interrupted by Covid, the digital world took a step forward and investors ploughed money into the electrification agenda.
But, looking at the longer-term picture, things aren’t quite so rosy. As of May this year, Wood’s flagship fund, Ark Innovation, had lagged the S&P 500 for five years. In fact, the fund is down around 66% over the last 12 months.
And this is reflected across the Ark portfolio. Ark Fintech is down 63% over 12 months and down 24% over five years. All portfolios have taken massive hits over the past year. Over Wood’s preferred five-year timeline, the returns are either negative or a small upside.
So should I invest like Cathie Wood to get rich? It’s not for me. I’ll continue picking a handful of growth stocks to complement my compound returns strategy. But a growth-focused portfolio isn’t my choice.
