Growth and value are two fundamental approaches, or styles, in
stock and stock mutual fund investing. Growth investors seek
companies that offer strong earnings growth, while value investors
seek stocks that appear to be undervalued in the marketplace.
Because the two styles complement each other, they can potentially
add diversity to your portfolio when used together.
Growth and Value Defined
Growth stocks represent companies that have demonstrated
better-than-average gains in earnings in recent years and that are
expected to continue delivering high levels of profit growth,
although there are no guarantees. "Emerging" growth companies are
those that have the potential to achieve high earnings growth but
have not established a history of strong earnings growth.
The key characteristics of growth funds are as follows:
- Higher priced than broader market. Investors
are typically willing to pay high price-to-earnings multiples with
the expectation of selling them at even higher prices as the
companies continue to grow.
- High earnings growth records. While the
earnings of some companies may be depressed during period of slower
economic improvement, growth companies may have the potential to
achieve high earnings growth in different economic
- More volatile than broader market. The risk in
buying a given growth stock is that its lofty price could fall
sharply on any negative news about the company, particularly if
earnings disappoint on Wall Street.
Value fund managers look for companies that have fallen out of
favor but still have good fundamentals. The value group may also
include stocks of new companies that have yet to be discovered by
The key characteristics of value funds include:
- Lower priced than broader market. The idea
behind value investing is that stocks of good companies will bounce
back in time if and when the true value is recognized by other
- Priced below similar companies in industry.
Many value investors believe that a majority of value stocks are
created due to investors' overreacting to recent company problems,
such as disappointing earnings, negative publicity, or legal
problems, all of which may raise doubts about the company's
- Carry somewhat less risk than broader market.
However, as they take time to turn around, value stocks may carry
more risk of price fluctuation than growth stocks.
Growth or Value...or Both?
Which strategy -- growth or value -- is likely to produce higher
returns over the long term? The battle between growth and value
investing has been going on for years, with each side offering
statistics to support its arguments. Some studies show that value
investing has outperformed growth over extended periods of time on
a value-adjusted basis. Value investors argue that a short-term
focus can often push stock prices to low levels, which may create
buying opportunities for value investors.
History shows us that:
- Growth stocks, in general, have the potential to perform better
when interest rates are falling and company earnings are rising.
However, they may also be the first to be punished when the economy
- Value stocks, often stocks of cyclical industries, may do well
early in an economic recovery but are, typically, more likely to
lag in a sustained bull market.
|Growth vs. Value: Compare the
|Both growth and value stocks have taken turns leading and
lagging one another during different markets and economic
|Source: ChartSource®, DST Retirement
Solutions, LLC, an SS&C company. For the period from
January 1, 1990, through December 31, 2020. Growth stocks are
represented by a composite of the S&P 500/BARRA Growth index
and the S&P 500/Citi Growth index. Value stocks are represented
by a composite of the S&P 500/BARRA Value index and the S&P
500/Citi Value index. It is not possible to invest directly in an
index. Index performance does not reflect the effects of investing
costs and taxes. Actual results would vary from benchmarks and
would likely have been lower. Past performance is not a guarantee
of future results. © 2021 SS&C. Reproduction in whole or
in part prohibited, except by permission. All rights reserved. Not
responsible for any errors or omissions. (CS000170)
When investing long term, some individuals combine growth and
value stocks or funds. This approach allows investors, in theory,
to take advantage of different economic cycles and smooth out
returns over time.