Growth vs. Value Investing, It’s Not Always an Either-Or Option
September 29, 2021
There are two common investment styles when it comes to buying stocks: growth investing and value investing.
Both styles of investing offer opportunity to investors or shareholders. Value investors look for stocks they believe are undervalued by the overall market, while growth investors seek stocks that they think will deliver better-than-average returns compared to the overall market.
It doesn’t have to be an either-or-option when it comes to choosing your style of investing. Some companies share attributes of growth and value. How you choose to invest your money should depend on your personal financial goals and what will help you reach those goals.
Value investors look for stocks with share prices that don't fully reflect the value of the companies, and that are trading at a discount to their full potential. The stock may have a low valuation for several reasons, ranging from management issues, legal challenges, to an increase in competition. It could also be an industry that has fallen out of favor for investors or has fallen on hard times such as the oil crisis that we faced in 2014. The value investor believes that the company’s stock price will rise to reflect what the company is worth. The challenge for an investor focused on value investing is to find companies that are truly undervalued vs. those which might have a low value for a good reason. Investors will typically comb the company's financial reports, looking for clues about the company's management, operations, products, and services.
Growth investors are looking for companies who are expanding rapidly. They want to invest in stocks that will appreciate in price despite the higher amount of risk involved. A growth investor will buy into companies and industries who have accelerating growth. An investor who is focused on growth stocks will look at stocks to identify a consistent increase in stock price, sales and earnings increasing quarter to quarter, an increase in the volume of trades in the stock, or a recent announcement from the company that could generate investor interest. These companies are considered to have a high probability for expansion over the next few years because of their products or because they appear to be better off than their competitors.
Which one is better?
Growth and value stocks have historically alternated in popularity. Growth stocks have been favored for the last decade, but in light of the recovery from COVID-19, we have started to see value stocks reemerge as a favorite. The stock market goes in cycles of varying lengths that either favor growth or value strategies.
Also, a company could start out as a growth stock and then later become a value company. When it comes to diversification within your investment portfolio, you should consider owning both growth and value companies. Diversification has historically helped to reduce volatility within portfolios because it minimizes the reliance on one single stock or investment to perform well in order to achieve success.
Before investing, it is important to define what your objectives are as well as what your time horizon is. Knowing what you want your money to do for you - and when - will go a long way to helping you choose appropriate investments that align with your objective.
If you would like to develop a long-term financial strategy or review a strategy you already have in place, please contact an advisor at Morey and Quinn Wealth Partners. We can help you get started, today.
By Katie Bruno, CFP®, CDFA®, MIMFA
Morey & Quinn Wealth Partners
Raymond James® LIFE WELL PLANNED.
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Any opinions are those of Katie Bruno, CFP®, CDFA®, MIMFA, and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.
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