Growth vs Value Investing: Where should you be putting your money?

Key Takeaways

  • Growth investors look for those stocks or mutual funds that have a very high growth potential in the future in terms of revenue, profit or some other metric. They are not bothered with splitting hairs on high current valuations or price-to-earnings ratios.
  • Value investors look for those stocks or mutual funds that are a good value for money with current price-to-earnings ratios below market or industry averages. These investors believe that as long as the underlying fundamentals of the company are strong, their stock prices will rebound at some point in the future.
  • The ideal strategy would be to have both kinds of stocks in your portfolio with almost a 50-50 split. This would place you in a good position to capitalise on high gains during good times (bull markets) from growth stocks and keep your returns above the red line during bad times (bear markets) as your value stocks would perform better. 

BOTH. There, we answered it for you right at the beginning! In an ever polarising world, we often see people pigeonholing themselves into one ideology or another, and then engaging in fierce debates with the other faction to come out on top as the superior one. But life doesn’t need to be so black or white. It is in fact beneficial to hover between the two sometimes and explore the grey area as well. What does that mean for investing? Let’s look beyond philosophies and delve into the specifics.

growth vs value investing

What is growth investing?

Growth investors look for the current market winners and continue to back them to do well in the future. As the name suggests, these investors look for those stocks or mutual funds that have a very high growth potential in terms of revenue, profit or some other metric. They are not bothered with splitting hairs on seemingly high current valuations or steep price-to-earnings ratios. Instead, they are more focused on future values and growth trajectories. These investment opportunities are most commonly disruptors such as technology mutual funds or stocks such as Tesla or Palantir.

growth investing

What is value investing?

Value investors on the other hand are on the hunt for hidden gems or those stocks that have been neglected in recent times. As the name suggests, they are a good value for money with current price-to-earnings ratios below market or industry averages. The current low value of a company could be due to a number of reasons such as a public relations crisis or below expected profits in the short term. Value investors believe that as long as the underlying fundamentals of the company are strong, their stock prices will rebound at some point in the future and they will end up making money from the recovery. These investment opportunities are most commonly established industry incumbents such as big banks or energy companies such as Bank of America or Exxon Mobil.

value investing

What are the differences between the two?

It is important to understand that the objective of both of these methodologies is to make money by buying low and selling high. The difference lies in the approach to achieve this end goal.

Differences

Growth Investing

Value Investing

Price

Currently overvalued with high price-to-earnings ratios.

Currently undervalued with low price-to-earnings ratios.

Dividends

Generally low or no dividends

Generally high dividends.

Type of stocks

Typically established large caps.

Risk

Generally high price volatility with possibilities of large down swings.

May not appreciate as much as expected.

differences between growth and value investing

Which one is better?

Generally speaking, neither is better or worse. If you were to look at the short term performances of growth and value stocks, you might conclude that one is better than the other. For example, if you were to look at a bull market, growth stocks will be the clear winners whereas, if you were to look at financial downturns, value stocks will be the outperformers. So if you had a crystal ball and could time bull and bear markets accurately, you could toggle between the two types of strategies to gain high returns. But market timing, as evidenced by years of data, does not work well for most people as it’s hard to predict future price movements.

Hence, the ideal strategy would be to have both kinds of stocks in your portfolio with almost a 50-50 split. This would place you in a good position to capitalise on high gains during good times (bull markets) from growth stocks and keep your returns above the red line during bad times (bear markets) as your value stocks would perform better. This is considered the next layer of diversification on top of asset class, country and sector diversification. To put things on auto-pilot, make sure your portfolio is also automatically rebalanced to protect it from risks of overcontration and gaining from the sell high buy low principal.

investment portfolio

Bottom Line

Growth and value investing, both have their merits and their shortcomings. The best strategy is to employ both of these approaches so that your portfolio is essentially an all-weather portfolio. Keeping these key strategies in mind, we are working on a tool to make this journey as easy as clicking a button for you. Stay tuned!

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