Growth vs value investing: which is right for you?

Key Takeaways:

• Value stocks are equities trading at a price below which analysts consider to be their true worth.

• Growth stocks are those delivering better-than-average returns and are expected to continue to perform better than the market over time.

• While the two are generally looked upon as competing with one another they can actually be complementary in a diversified portfolio.

Investing styles can be divided into a pair of categories — value and growth. While the two are generally looked upon as competing with one another, they can actually be complementary in a diversified portfolio. The key is to find an optimal blend consistent with the achievement of an investor’s specific goals. 

Growth vs Value Stocks

Generally, growth stocks are equities that are delivering better-than-average returns and are expected to continue to perform better than the market over time. Meanwhile, value stocks are those that are believed to be trading for less than their worth, which gives them the potential to deliver an outstanding return on an investment. 

Growth stocks are usually those companies expect to do well in the future because demand for their products is expected to increase. Another reason these stocks might be considered to be poised for progress is the expertise of the company’s management team. Typically, growth stocks have a higher price than the market in general and boast strong earnings growth but are more volatile than the market as a whole. 

Value stocks are equities that are trading at a price below which analysts consider to be their true worth. This can happen for several different reasons, chief among them a temporary change in public perception of the company, its management team, or its key product(s). New companies, whose potential have yet to be recognized, can fall into this category as well. 

The traits of value equities include pricing lower than the market in general, and especially lower than that of similar companies in the field in which it is operating. Value equities also tend to carry less risk, although it might take some time for them to come to fruition. 

In a nutshell, value stocks are usually undervalued, have low PE ratios, and high dividend yields, but aren’t expected to appreciate significantly. Meanwhile, growth stocks are usually over valued, have above-average PE ratios, low or no dividend yields, and their volatility tends to be somewhat high.

Growth vs Value and the S&P 500

While the index does not have formal classifications for growth and value stocks, tech and consumer discretionary stocks, which comprise 40% of the S&P 500, tend to fit into the growth category. Financials, industrials, energy, and consumer staples, comprising 29% of the index, are characteristic of value-oriented equities. As an example, banks like JPMorgan Chase & Co. (NYSE:JPM) tend to fit in the value category, while a company like Google (NASDAQ:GOOG) fits solidly into the growth category.

Investing in Growth vs Value

Value investors can be likened to speculators, in that they are looking for stocks with low prices and great potential. Growth investors, on the other hand, tend to flock to stocks with strong performance histories. They are betting that a stock that is already performing admirably will continue to do so, which makes it an attractive investment in their eyes. 

Value stocks are considered to represent less of a risk because the companies behind them are usually well established. Moreover, the fact that they pay dividends and are expected to return capital growth also makes them desirable. 

Meanwhile, growth stocks usually reinvest earnings, rather than paying dividends, in an effort to expand the companies they support. This is one of the reasons growth stocks can be more of a risk, as there is always the possibility the level of growth achieved will fail to match up to expectations. 

As for which represents the better investment opportunity, the market tends to be cyclical in that regard. The Bull market that ran from 2009 to 2020 saw growth outperform value. However, value outperformed growth during the prior decade.

Generally, growth stocks tend to deliver better returns during periods within which interest rates are declining and company earnings are ascending. On the other hand, a cooling economy tends to affect these stocks first. Value stocks tend to be more cyclical and show stronger performance when the economy is in a period of recovery. Sustained bull markets tend to bog the performance of value stocks.

Growth vs Value and Diversification

Because the market is cyclical in general and particularly when it comes to the performance of growth vs value, it can be useful to invest in both equally. This gives a portfolio the ability to benefit from volatility, rather than being punished by it. 

With that said, the decision should ultimately be guided by the preferences, goals, risk tolerance and time horizons of the individual investor — keeping the cyclical nature of the market in mind.

Again, value stocks tend to shine in bear markets and recessions, while growth stocks perform better during bull markets and periods of expansion. Short-term investors, as well as those whose strategies are predicated upon market timing, would do well to take those factors into consideration. 

Diversification and Alternative Investments

Along with a healthy balance of growth and value oriented stocks, alternative investments can also be useful tools for portfolio diversification, which is generally agreed upon by experts to be a smart investment strategy to pursue. Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings.¹

Real estate, private equity, venture capital, digital assets, and collectibles are among asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. 

These asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million.  

However, platforms like Willow Wealth provide curated access to private markets for individual investors.   

Investors can get started with minimum investments as low as $5,000 for their first investment (subject to certain exceptions). Willow Wealth offers a curated selection of opportunities across multiple asset classes, ranging from individual investments to diversified funds and automated portfolio solutions. While these investments carry risk, they open the door to opportunities across real estate, private credit, private equity, and more.  

Join more than 500,000 members and start investing in private markets today at willowwealth.com. 

The Bottom Line

To summarize, growth investors buy shares of a company with outsized growth potential. Meanwhile, value investors seek assets they believe to be undervalued by the market and that pay dividends. Again, though, while the two styles are generally looked upon as competing with one another, they can actually be complementary in a diversified portfolio. This can help position an investor to better weather periods of volatility. The key is to find a blend consistent with the achievement of an investor’s specific goals.

1 All investments involve risk, including the possible loss of capital.   There can be no assurance that any product or strategy described herein will achieve any targets or that there will be any return of capital. Past performance is not a guarantee or reliable indicator of future results. Current performance may be lower or higher than the past performance data quoted. Any historical returns, expected or target returns are hypothetical in nature and may not reflect actual future performance.  All performance and/or targets contained herein are subject to revision by Willow Wealth and are provided solely as a guide to current expectations.