Growth and value stocks have taken their lumps along with the rest of the market, but over the past 20 years these two asset types have experienced similar gains (see chart).
However, the returns from growth and value investments in any given year are not always closely correlated. Maintaining a balance of growth and value investments may help you add a new dimension of diversification to your portfolio. A good first step is to understand the key differences between these investing approaches.
Going for Growth
Growth stocks are associated with companies that tend to have a strong historic growth rate as well as strong growth potential. These companies usually don’t offer dividends because profits are typically reinvested in the company.
A growth company might have an advantage in a rapidly growing new industry or be on the verge of a major breakthrough. Because growth stocks can offer high potential rates of return, they may carry significant risk, which should be considered carefully before investing.
Value stocks are typically believed to be undervalued by the market. Good candidates are often firmly established companies with solid earnings, but the market has not yet recognized their potential. A value stock investor strives to buy shares of these companies at a bargain price with the expectation that the broader market will eventually realize the companies are a good investment, potentially causing the share price to rise. Value stocks may or may not be a good source of dividends.
The return and the principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. Investments offering the potential for higher rates of return also involve a higher degree of risk. Diversification does not eliminate the risk of investment losses; it is a method used to help manage investment risk.
Some investors swear by growth or value investing. But by picking the best opportunities from both types of investments, you may be able to broaden your return potential while spreading risk over a more diversified portfolio.