Is There A Difference Between Growth And Value Stocks?

Investing in “value stocks” for long-term growth may be a wise model. You don’t just need “growth stocks” to grow your nest egg.

THE DIFFERENCE BETWEEN VALUE AND GROWTH STOCKS

Long-term, value investing has delivered higher returns than growth investing. “Growth stocks” are known by that name because they grow their earnings at a faster average rate than the market. A downside of fast growth stocks can become expensive and overvalued.

Value investors buy stocks that may not reflect their true value based on fundamental metrics such as a low price-to-earnings ratio or low price-to-book ratio. Value stocks can be undervalued because of a stock market downturn, an industry slump, or competitive factors. When the company’s fundamentals improve, the stock value rises closer to its intrinsic value.

HOW DO YOU CHOOSE VALUE OR GROWTH?

Growth and value stocks have different cycles. When growth is weak, value stocks may be strong. A well-diversified portfolio holds both growth and value stocks.

THE OPTIMAL ASSET ALLOCATION

Unfortunately, there is no optimal market allocation of growth and value stocks.

When you buy growth stocks you accept a trade-off between higher potential returns and higher potential losses. Value stocks, on the other hand, may earn lower short-term returns but experience less volatility.

The percentage of your portfolio that should be growth (high risk-return) vs. value (lower risk-return) stocks depends on your appetite. Since both are stock investments, you expose yourself to the real risk of loss of principal.

As someone who likes the risk in rollercoasters, but doesn’t want to be turned upside down by the stock market, I like to analyze a company’s fundamentals and choose value stocks. While no stock is “risk-free,” value stocks can add value (and potential growth) to a long-term growth portfolio.