Choose
Your Weapon: Growth or Value
When
developing a financial strategy, most investors eventually face a decision
between growth stocks and value stocks. The question is an old one, and
arguments on both sides of the coin may be compelling.
Go
for Growth — Growth stocks lure investors with their
potential for price appreciation over time. These stocks may represent companies
with a track record of expansion or industries in which technology has created
new avenues for growth. The companies may have tremendous potential, but they
also carry a high degree of risk and volatility. During the last 10 years,
growth stocks earned 39 percent in their best year (1998) and lost 28 percent in
their worst year (2002). (See accompanying graph.)
Side
with Value — Value stocks typically represent companies
with solid earnings and positive prospects. Despite the companies' strong
performance, their stock prices remain undervalued by the market as a whole.
Value seekers invest in these stocks with the hope that, as the companies gain
exposure, their share prices will rise.
Although growth
stocks often outperform value stocks, this wasn't the case over the last 10
years, as you can see in the chart. From 1994 through 2004, value stocks earned
a 15 percent average annual return, compared with 13 percent for growth stocks.
Of course, past performance is not a guarantee of future results. The return and
principal value of stocks fluctuate with changes in market conditions. Shares,
when sold, may be worth more or less than their original cost.
Most financial
experts agree that the best answer to the growth-versus-value question is
somewhere in the middle. Because growth and value stocks may react differently
to market conditions, it may be a good idea to consider having both in your
portfolio.
