When it comes to building wealth through the stock market, there are two essential concepts that we believe should be top of mind for any investor: quality and growth. But what do these terms actually mean? And why is aiming for growth so important—even post-retirement?
Growth investors focus on companies they believe have high potential to increase revenue, market share, and profit over time. Unlike “value” investing, where the goal is to identify stocks that one believes are undervalued and trading below their perceived worth, capturing the difference between the current price and their supposed value, growth investing looks ahead to the future.
Great companies to us don’t just maintain the status quo; they should expand beyond it. Identifying and investing in companies that can do this is, we believe, are the keys to creating wealth.
While past performance is no guarantee of future results, historically, growth stocks have often outperformed over the long term, even if they experienced short-term fluctuations.1 As of February 5, 2025, the 20-year cumulative return on the US Growth Index is 784.9%, more than 100 percentage points ahead of the 651% of the US Market Index.2
As we age, we have different financial and investment priorities.3 For investors in their early years, who have decades to compound their savings, financial planners typically weight their portfolio allocations more heavily towards growth. That’s because those decades of time both can give companies time to manifest growth and give the stock market time to recognize it.
In midlife, investors are typically still focused on accumulation but may shift their asset allocation to balance the desire for growth with safety in order to help minimize the possibility of sequence of returns risk. However, investors at this stage still have at least a decade and likely more before retirement, and growth investing can help maximize the accumulation of resources for those post-retirement years.
But that doesn’t mean retirees should avoid growth investing. Investors will likely want to shift the focus of their portfolios toward stable and income-producing assets. However, we believe keeping a portion of those portfolios allocated to growth stocks is still important for two main reasons.
Inflation can erode purchasing power over time; part of the goal of investing in the stock market is to outpace inflation so your assets don’t lose value.
If you’re lucky, retirement can last a very long time. You want your assets to last as long as you do and then some. While your stable and income-producing investments can help meet your near-term needs, your growth investments can continue to power your longer term goals, no matter how old you are.
Not all growth is equal. We believe that the best investments involve quality growth.
Investing in quality companies can seem like a no-brainer, since a low-quality company would seem pretty likely to disappoint. But many people invest in companies we would describe as low-quality because they’re trading, not investing, and they’re looking solely at price movements instead of the fundamentals underneath those price movements.
When you invest in a company, you own a very tiny slice of that company. While everything from the weather to political news to the time of year can affect short-term prices, our experience has historically been that over the long term, stock prices reflect the underlying value the company is creating.
Quality, though, can mean many things. Here at Motley Fool Asset Management, we have specific criteria for what we mean by quality. Analysts vet every potential investment against our Four Pillars of Quality. If they don’t measure up? We don’t invest.
Management is the engine that drives a company. Visionary management, a clearly defined strategy, and a motivated team are all, we believe, essential factors for success. Great leaders not only articulate winning strategies but foster a culture where innovation can thrive. Without such a foundation, even the best ideas can wither on the vine.
Does the company’s leadership seem truly and deeply invested in success? In high-quality companies, both management and employees have emotional and financial skin in the game.
A high-quality business has strong fundamentals like consistent revenue growth, increasing profits, efficient use of capital, and a scalable business model. But it’s also important to look beyond these numbers and think about factors such as customer loyalty and pricing power. Both are necessary to build a genuinely solid economic foundation.
A healthy balance sheet and a strong economic model are non-negotiable. Further, it’s essential to ask whether the company is growing profitably today and, more importantly, can that growth sustainably continue into the future.
Competition is one of the biggest challenges for any business. Quality companies stay ahead of the game and have a “competitive moat,” or a unique service, innovative products, or strong brand loyalty that keeps competition at bay. A high-quality company stands out in the crowd and is positioned to fend off rivals for years to come.
High quality companies are always moving forward. In evaluating a company, consider the industry. Is there room to grow? Can the company maintain its competitive advantage as it scales? Will changing demographics, global trends, or changes in the regulatory environment favor the company?
It’s not just current performance that counts, but the runway ahead. In our opinion, companies we believe are positioned to grow within booming industries are ideal.
Quality and growth investing aren’t just strategies; they’re philosophies.
By focusing on companies that combine great leadership, sound economics, sustainable competitive advantages, and long-term potential, we believe we’ll find the growth companies that can lead our funds into outperformance.
And that can help you achieve your financial goals—no matter your life stage.