If your portfolio is rising 10% per year, you’re likely outperforming the market. Although the TSX is doing better than that this year, that’s not typical for the index. If not for a poor finish to 2018, things would look a lot different today. Last year, the TSX was down a whopping 12%, and the year before that it only rose by 5%.
If we look at the index from 2010 through to the end of 2017, the index increased by 44%, which averages out to a compounded annual growth rate of about 4.7%, well short of even 10%. And so that raises the question of whether a TSX investor should realistically be able to expect to earn 10% per year if doing so would mean not only beating the market but more than doubling its returns.
Are growth stocks the key to double-digit returns?
One way for investors to try and outperform the market would be to invest in growth stocks, which can perform very well.
If we look at a stock like Shopify (TSX:SHOP)(NYSE:SHOP), its returns of more than 1,200% in just five years have eclipsed what the TSX has been able to do. Even if we look at this year alone, the stock has already more than doubled, and unless it has a catastrophic finish to the year, it won’t come close to the TSX’s returns.
If we look at the past two years, including the disappointment of 2018, Shopify’s stock is still up around 300%. The tech stock has proven to be one way for investors to outperform the market, and even though it’s a fairly expensive stock today, it still seems like a good bet to continue doing so.
The challenge for investors, however, is that finding a stock like Shopify isn’t always easy. And the danger with tech stocks is that if you pick the wrong one, you can end up incurring some significant losses. A stock like BlackBerry has lost around 90% of its value over the past 10 years, and it’s an extreme example of how badly things can go for a once-popular tech stock.
Growth stocks, whether they’re in tech or cannabis or some other industry, have the potential to outperform the market as a whole, but there’s definitely some risk investors have to take in the process. Even the high-growth cannabis industry has run into challenges lately, and sell-offs haven’t been uncommon.
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To outperform the TSX’s returns and to reach more than 10% is certainly possible, but it’s also not likely to be risk-free. Over the long haul, mirroring the TSX will likely produce positive returns for your portfolio, but with growth stocks, the picture is not as definitive.
Anytime you invest in one stock, whether it’s a growth stock or not, you’re going to be taking on some risk that an index will diversify away. However, the potential returns will be minimized as well, and that’s where if you’re willing to take on some risk, then there’s certainly room to easily outperform the market, but you shouldn’t expect it to be a guarantee or that there won’t be bumps along the way.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor David Jagielski owns shares of BlackBerry. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of BlackBerry, BlackBerry, Shopify, and Shopify. BlackBerry and Shopify are recommendations of Stock Advisor Canada.