When you decide to invest in the stock market—you have multiple decisions to make.
Are you going invest all at once?
Are you going to buy 1 stock?
Do bonds make sense?
Should you buy an ETF or mutual fund? And something that is getting a lot of press these days….. are you going to be a “growth” or “value” investor?
In this post we will explore the last question — growth vs value stock investing. And we will tell you which one to apply to get to financial independence.
Ready? Let’s get started.
Definition and Examples of Growth Investing
Growth stock investing has to do with investing in companies that plow most/all free cash back into the company. A growth stock is any share in a company that is anticipated to grow at a rate significantly above the average growth for the market. These stocks generally do not pay dividends and are considered to be more volatile especially during an economic pullback. .
Growth investors primarily get their profits through capital gains. You would think growth investors invest in the stocks of young or small companies whose earnings they expect to increase at an above-average rate but some very large companies are classified as “Growth” as well.
Examples of large growth stocks
- Meta (FB) (formerly Facebook),
- Amazon.com Inc. (AMZN), and
- Netflix Inc. (NFLX).
Definition and Examples of Value Investing
Value investing has to do with investing in stocks whose prices have fallen. Stocks like that have low price-to-earnings (P/E) or market-to-book (M/B) ratios. These are older more mature companies whose share price is down. A value stock generally trades at a price that’s cheaper than its financial performance. Most people expect these stock prices to rebound over time.
Examples of value stocks
- Bank of America
- Procter & Gamble
- Johnson & Johnson.
Which Has Done Better Historically?
Looking back in history, it is clear that value and growth investing have each done better in different economic cycles.
When interest rates are falling and company earnings are rising, growth stocks generally have the potential to perform better. But the reverse is the case when the economy cools and interest rates rise.
On the other hand, value stocks do better during slowing economic times and early in recoveries.
But all of this makes sense. During boom times, growth should do better (value can go up too) and during busts, value should hold up better (but both will probably go down)
Which Has Done Better in the Last 2 Years?
2020 saw the world go through the test of a pandemic. During that period, and even after, growth investing has stood successful. Growth investing outperformed value investing by a slight margin in 2020. It got a huge lift at first while value stocks suffered.
Growth stocks tailed off and value rose in early 2021 as the economy began to recover.
Many financial experts are of the view that value should do better than growth in the coming years. This is because higher inflation and interest rates historically favor value stocks. Thus, financial services, energy, and industrials are the value sectors that will potentially benefit the most. (this is not investment advice)
Which is Doing Better Now and Which Should You Invest In?
Value stocks are actually holding up better in 2022 than growth due to rising rates and the War in Ukraine. But things can change quite suddenly, and a rising value stock today, can become tomorrow’s underachiever.
The decision to invest in growth vs. value stocks depends on your investment preference, personal risk tolerance, investment goals, and time horizon. Also, the performance of either growth or value depends also on the point in the cycle that the market happens to be in.
If you want to invest long term, it’s okay to combine growth and value stocks. This is called a “Blended” strategy. This is actually the smartest approach to invest through multiple economic cycles. Both styles complement each other, and they can help add diversity to your portfolio when you use them together.
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