Growth stocks and value stocks tend to take turns leading the market and, as a result, investors often raise the question of which of these two types of stocks is really “better.” While both share a similar longterm, disciplined approach to investing, they are different, and advocates of the two investment styles go about their business in fundamentally different ways.
Growth stocks are those of successful companies with the potential to sustain growth over the long term. In searching for these stocks, analysts look for firms with healthy profits, rising sales, and solid balance sheets. Value stocks are those of financially solid companies that may be “on sale” due to temporary, non-fundamental reasons. In searching for these stocks, analysts look for situations in which all the good news is not yet reflected in the stock’s price.
Value and growth are typically countercyclical, outperforming during different phases of an economic cycle. In a struggling economy, and during the early stages of recovery, value stocks have historically outperformed growth stocks; late in the recovery cycle, growth stocks have typically dominated.
In the late 1990s, for example, growth stocks dominated the market and value stocks were overlooked. In March 2000, how-ever, the bubble burst, and value stocks started outperforming. We saw a similar dynamic during the last great financial crisis that occurred around 2008.
So it is actually not a question of which is “better” you will likely want both in your portfolio. Just as diversification be-tween stocks and bonds is important, it is also important to diversify by type of stock.
Note: This material has been prepared for informational purposes only, and is not intended to provide financial advice for your particular situation.
Yann Kostic, MBA and Tom Zachystal, CFP, are Presidents of their respective Assets Management firms, both US-Registered Investment Advisors (RIA). Tom is the San Francisco Financial Planners’ Association President. Tom and Yann cater to US expats in Mexico and worldwide. Comments, questions or to request his newsletter, “News you can use” contact him at firstname.lastname@example.org, in the US at (321) 574-1 529 or in Mexico, (376) 106-1613.