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.
If you’re not sure what the right mix of growth and value stocks should be in your portfolio, watch this video to ...
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There are differing types of growth and value stocks.
In general, many value stocks are overly risky especially the ones that pursued increased dividends at the cost of increased debt. If the dividends aren't sustainable there will be a sharp stock decline when the dividend is cut. Other value stocks, especially the ones that were left behind in the rush to cash in on the market run are still pretty decent. It may be time to look at the laggards, especially ones that will benefit from higher rates.
Likewise, many growth stocks are overvalued, however, some growth stocks are in industries that will still grow even in market weakness and change the world. Selectivity is now important and sadly most funds are clearly not that selective anymore. The main growth stocks to stay away from are housing market stocks which, if the market swoons will face not only decreased pricing and rents but the asset will also drop which could make their losses more extreme than others.
It was the real estate market that transformed the last downturn into a nasty one and may yet do the same in the next downturn. You know the saying, fool me twice shame on me. Beware and be attentive during volatility.