Growth or Value: Room for Both?

Over the past 25 years, large-cap value stocks slightly outperformed large-cap growth stocks (see chart). Does this mean the age-old debate about growth versus value is over, and you should jettison the growth stocks in your portfolio? Not so fast.

Growth stocks haven't always lagged behind their value counterparts; in several of the past 25 years, they outperformed value stocks by double digits.

Because there's no telling what the future will bring, you may want to continue owning both for diversification.

Growth of Value, Value of Growth

Growth stocks are associated with companies that have favorable growth potential. These companies tend to have both a strong history of growth and strong projected growth. They typically pay minimal dividends because it is usually advantageous for them to reinvest profits. They also may be on the verge of a major breakthrough or possess a favorable position in an up-and-coming industry that could eventually cause their stock prices to rise dramatically. Of course, growth stocks may carry significant risk, which should factor into any purchasing decision.

Value stocks are typically believed to be undervalued by the stock market. Good candidates are often firmly established companies with solid earnings whose potential has not yet been recognized. A value stock investor strives to buy shares of these companies at bargain prices with the expectation that the broader market will eventually realize the companies are good investments, potentially causing the share prices to rise. Value stocks may or may not be good sources of dividends.

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. Diversification does not guarantee against loss; it is a method used to help manage investment risk.

One school of thought holds that the best way to pick stocks is to look for the most compelling opportunities, whether growth or value. Understanding the differences between growth and value may help you better set your expectations for the stocks in your portfolio.

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