Growth Vs Value
Both growth and value stocks can maximize value for investors, as they are both fundamental approaches that somehow complement each other, they can help add diversity to one’s portfolio. Growth stocks are expected to outperform the overall market over time because of their future potential. While Value stocks may trade below what they are really worth and will therefore theoretically provide a superior return. When investing long term, some individuals combine growth and value stocks or funds for the potential of high returns with less risk. This approach allows investors to, in theory, gain throughout economic cycles in which the general market situations favor either the growth or value investment style, smoothing any returns over time.
- You can track whether growth or value investing is doing better by a simple ratio
- Take the Russell 1000 Value Price Index / Russell 1000 Growth Price Index
- When this is > 1, value is doing better than growth
- When this is < 1, growth is doing better than value
- Growth vs. Value doing better tends to shift over long cycles
- 1980 to 1987 Value outperformed growth
- 2000 to 2008 was a time when growth outperformed
- From 2008 to ???? growth outperformed value (one of longest periods when growth outperformed value)
- Over the long term, PE ratios can help predict future returns
- Investing when PEs are historically high suggests that future returns will be low or even negative
- Investing when PEs are historically low suggests that future returns will be higher than average
- Note: this does not apply in the short run. Expensive stocks can continue to get expensive (or Vice Versa)