Growth vs. Value Investing

Over the past 10 years, value investing has proven to be the winning style, beating out growth 10.95 percent to 6.73 percent in average annual returns.¹ Does this mean value is better, or that growth is overdue for a comeback?

Growth and value investments tend to run in cycles, so including both types in your portfolio could be one way to help diversify your holdings and potentially reduce volatility. Diversification does not guarantee against loss; it is a method used to help manage investment risk.

Growth Opportunity

Growth companies are successful industry leaders that have demonstrated consistent earnings growth and the potential for continued growth. These companies' stocks tend to be expensive relative to what they are earning. Growth-oriented stocks, therefore, generally have a high price-to-earnings (P/E) ratio. Growth investors are generally willing to pay more for these stocks because they believe these companies may be worth more in the future.²

Good Value

By contrast, value stocks are undervalued by the market and are considered to be trading below their true value.³ This could be for a number of reasons. The company could be suffering from an unsuccessful product launch, may be experiencing other problems but expected to recover, or could simply be in a mature industry that has only modest growth potential. These stocks are typically selling at a price below their historic averages or below their industry peers. Value investors believe these companies have strong fundamentals and are a bargain buy.

When you read magazines and newspapers, you will likely see experts tout the benefits of one style over the other. Deciding what is appropriate for you requires a detailed look at your portfolio and an understanding of your specific needs and goals.

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. Investments seeking to achieve higher returns also involve a higher degree of risk.

1) Thomson Financial, 2006, for the period 12/31/1995 to 12/31/2005. The Russell 1000 Growth Index is considered representative of growth stocks, and the Russell 1000 Value Index is considered representative of value stocks. The performance of an unmanaged index is not indicative of the performance of any particular investment. Individuals cannot invest directly in an index. Past performance is no guarantee of future results.
2) Standard & Poor's, 2006
3) Journal of Financial Planning, January 2006

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