Growth stock or value investing — what’s better? The battle between growth and value investing has been going on for years, with each side offering statistics to support its arguments. Weighing the merits of these two different investment styles is like choosing between chocolate and vanilla. You want both.
A growth stock is a share in a company that is anticipated to grow at a rate significantly above the average for the market. These stocks generally do not pay dividends, as the companies usually want to reinvest any earnings in order to accelerate growth in the short term. Investors then earn money through capital gains when they eventually sell their shares.
A value stock is a stock that tends to trade at a lower price relative to its fundamentals, such as dividends, earnings and sales, making them appealing to value investors. Many great investors have been value investors, like Ben Graham and more recently his better-known disciple, Warren Buffett.
When investing long-term, some individuals often 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 different economic cycles that favor one style over the other.
For over 80 years, value stocks have proven to have a higher annualized percentage; however, since the Great Recession, growth stocks have yielded better results. What’s happened? One factor hurting value stocks is that traditional value sectors like energy and financials have been hard hit since the financial crisis. Another factor benefiting growth names is that, despite the huge advances they have seen in recent years, they are not unusually expensive — at least not relative to value stocks.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Sectors are Realigning
According to a recent article in The Wall Street Journal, value stocks are not what they used to be. Heavy-equipment maker Caterpillar and farm-equipment manufacturer John Deere, long considered value stocks, now sell at the same valuations as growth stocks like Apple and Facebook. Does that mean that Caterpillar and John Deere should no longer be considered value stocks, or that Apple and Facebook now be considered value stocks? There’s no good answer.
Now the lines are blurring even more. Changes to MSCI’s and S&P Dow Jones’ Global Industry Classification Standard, made in early September, created a new communications sector, built largely out of stocks that currently occupy the telecom, technology and consumer discretionary sectors. Growth stocks Facebook, Google, Netflix and Walt Disney, are now in the same sector with value stocks like AT&T and Verizon. This marks the first time that a new industry group will be created in this fashion. These changes are not good or bad, just new.
“The realignment is unprecedented,” Morgan Stanley wrote in an analysis of the change. “Previously, the only sector change was the separation of real estate from financials in 2016, but this affected a smaller fraction of market cap, was simpler in terms of which stocks could go where, and had a longer lead time for investors to digest.”
The change is an attempt to better reflect the primary business of the different companies included in the new sector, which can often reach across multiple sector categories and don’t always accurately reflect the industry in which they’re currently classified.
Reviewing the Portfolio
Where does this leave the investor? Stocks need to be evaluated differently than before. If you thought about Google differently than Verizon, you may need to think about them now as the same, even though one is an Internet company and the other a telecommunications company.
As a result, when it comes to building a diversified portfolio, you may find you now have too many eggs in one sector basket and you’re not as diversified as you need to be.
Now is the time to examine your portfolio and ensure it’s invested appropriately to meet your short- and long-term financial goals.
This article is for informational purposes only. It is not intended as investment or tax advice and does not address or account for individual investor/taxpayer circumstances. Please click here for important additional disclosures.
-
Stock Market Today: Dow Slides 697 Points on Super-Hot Jobs DataWhen the December nonfarm payrolls report hit the tape, there was no question which way stocks would go at Friday's opening bell.
-
Essential Tech Tools for Managing Your Home and Finances While TravelingStay secure and stress-free on the go with the best tech tools for managing your home, bills and security from anywhere.
-
The Wrong Money Question to Ask After Trump's ElectionIf you're wondering what moves to make with a new president moving into the White House, you're being dangerously shortsighted. Here's what to do instead.
-
An Investing Plan for This Year: Doing Less Can Lead to MoreAchieve more when investing in 2025 by planning to work smarter, not harder. These three strategies can help put you on the right track and keep you there.
-
All About Six Types of Auto Insurance CoverageDo you know what your auto insurance policy covers? Here's a primer on some coverage categories, along with examples of how each type of coverage works.
-
Social Security and Medicare Funding: Is the Sky Falling?Social Security and Medicare are slowly running out of money, but what does that mean for the retirees counting on them? Actually, it's not all bad news.
-
What We Need to Do to Protect Retirees' Financial SecurityCognitive decline and aging in general put older retirees at risk of losing their financial security when they're the most vulnerable. What can be done?
-
Financial Planning: Sisters Should Be Doin' It for ThemselvesMore and more women are ringin' on their own financial bells (with apologies to Aretha Franklin and Eurythmics) — but that demands a robust financial plan.
-
Is Money Messing Up Your Family's Life?Parents who discuss money and attitudes toward money with their children are more likely to raise financially successful and responsible adults.
-
Do You Know the Power of Whole Life Insurance in Retirement?Worried about legacy planning, market volatility or where to get cash to cover surprise medical or home repair bills? This little-known tool could help.
