Growth vs. Value Investing: A Comprehensive Comparison
Growth and value are two essential approaches to investing in stocks, both with critical factors to consider. While value stocks have typically outperformed growth stocks, Forbes points out that over the past decade, the opposite has been true -- the Russell 1000 Growth Index returned 17% annually and the Russell 1000 Value Index 10%. However, not all investors are concerned solely with these statistics -- some utilize a combination of both strategies instead of one or the other and emphasize the importance of time consideration.
Growth investing involves focusing on stocks that are seen as overvalued with the highest potential for growth in profits, revenues, and cash flow.
Why choose growth investing?
Good approach if investing in companies with better management than others, or those which have a line of products expected to sell well
Growth stocks may perform better when interest rates are falling and company earnings are rising
Considerations for growth investing
More expensive due to their high potential profitability
Greater risk of losing money as negative news about a company could plummet its stock price
Overall more risky -- if predictions are wrong, loss will be greater
In contrast to growth investing, value investing seeks stocks that are undervalued and focuses on the stock’s fundamentals rather than growth potential.
Why choose value investing?
Value stocks are less expensive than growth stocks since they are undervalued
Lower risk and volatility since most value stocks are larger, well-established companies that may have gained a temporary negative perception and can recover quickly
Generally more favorable for small cap companies, though things like contributions, withdrawals, and time period should be considered
Considerations for value investing
Prices may fluctuate more during turnaround period
Value stocks can be less profitable in the short term
Which option is best?
While growth and value investing both have their own potential benefits, the biggest takeaway from this brief description of both is that there are two critical considerations when choosing a method: risk tolerance and time. Because of the high volatility of growth investing, that method clearly has a higher risk if stocks don’t perform as expected. Since value investing is often used with larger, more reliable companies, there is generally less risk. When it comes to time considerations, many investors use a mixed approach for the potential of high return and low risk since it can be nearly impossible to predict a winner.