Many people start their investing journey by putting money into growth stocks. This is entirely understandable, as shares that grow much quicker than the average obviously have the potential to build significant wealth over time.
Additionally, some growth stocks have famously delivered spectacular returns. AI chip maker Nvidia, for example, has skyrocketed 2,180% over five years and 20,470% across a decade!
Here, I want to consider how large a Stocks and Shares ISA portfolio could be after years of investing £700 a month into growth firms.
Should you invest £1,000 in Illumina, Inc. right now?
When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Illumina, Inc. made the list?
What are they?
Growth stocks are simply shares of companies that are growing much faster than the market average or their peers. If a listed business is consistently growing its annual revenue above 25% say, then it would normally be defined as a growth share.
Often, these stocks will be from the technology sector, but not always. Look at engine maker Rolls-Royce, which is now putting up very strong revenue and earnings growth in the double digits. The FTSE 100 blue-chip stock’s up 750% in three years!
Clearly then, growth firms can come in many guises, offering various avenues of growth for an ISA portfolio.
A cautionary tale
However, growth investing is certainly not without risk. Companies than can keep increasing their revenue and/or earnings in the double digits for long periods are rare beasts. As a result, many stocks that appear to be the real deal turn out not to be.
I’ve owned a handful over the years. One that sticks in my memory is Illumina (NASDAQ: ILMN). Shares of this gene-sequencing giant soared for many years, then started slumping as growth tailed off.
The stock’s down 83% since August 2021.
Illumina hasn’t done itself any favours in recent years. For example, it acquired biotech firm Grail in 2021 without securing the necessary regulatory approvals, which resulted in financial penalties, strategic setbacks, and a forced divestiture. Oops.
Today, the US firm is under new management and is trying to reignite the growth engine. Perhaps it will bounce back.
However, it was recently put on China’s ‘unreliable entity’ list of foreign firms. So it could face fines and restrictions in a long-term growth market that represents 7% of revenue. Not ideal.
Fortunately, I managed to sell my Illumina holding in 2022 before most of the share price damage was done. But it serves as a cautionary tale of what can go wrong and why companies need to be monitored closely.
How much?
The key to minimising such risks is to build a diverse portfolio. Despite disappointments like Illumina, my portfolio has benefitted from growth stocks such as Axon Enterprise, Intuitive Surgical, MercadoLibre, Shopify, and Games Workshop. All have been market-beaters.
There’s no specific rule on the number of stocks to own. But I would say 20-30 holdings is a good target, certainly for new investors.
Through such diversification, I reckon an 11% average return is achievable long term. That’s not guaranteed though, as it’s above the market average. But with sound stock research and consistency, such a return is not beyond the realms of possibility.
With this rate of return, someone investing £700 a month would go on to build a £1m ISA portfolio after 25 years. Starting from scratch, that would be some achievement.
