Growth vs. Value: Identifying the Right Investment Approach For You

While growth investors are on the hunt for booming stocks that have the potential to produce exponential returns, value investors are seeking to find treasures that are currently overlooked in the marketplace.⁶ Value stocks may be temporarily beaten down due to public relations scandals or unfavorable conditions within their industries.

Characteristics of value stocks include:¹

A deal in the stock market. Value stocks are considered bargains that have the potential to make a strong comeback.¹ It can be an attractive deal for investors who want to grab stocks at a low price. These stocks are trading below what they are currently worth in the marketplace, providing an opportunity for investors to scoop up potential gains that others may be overlooking.

Value stocks have relatively cheap valuations based on metrics like P/E ratios and long-term growth prospects.¹ But once the company rebounds, value investors expect to see the stock price rise as more investors understand its true value.

Both growth and value stocks have many potential benefits, but they each come with their own risks. When investors put their money into growth stocks, there’s a risk that the company may not grow as expected.⁶ When it comes to value stocks, there’s a risk that the company’s setback is longer than expected and dividends are cut or suspended.⁶ When investing your money in the stock market, it’s important to examine historical performance and trends to manage expectations.

As a student of the market, it’s important to pay attention to both growth and value cycles. Since no one can predict the future with absolute certainty, understanding historical performance can help you make more informed decisions.

Growth stocks and value stocks represent two fundamentally different approaches to stock investing that can offer lucrative opportunities to their followers. Deciding between the two approaches can be difficult if you’re just starting your investment journey. The first step you can take is to identify your goals and measure your risk tolerance. When you understand what you want and the potential loss you are willing to endure, every other decision on your investment journey becomes a bit easier.

Here are some factors to consider when determining the best investment strategy for you.

Risk tolerance:

It’s important to understand risk tolerance before making an investment decision. When people think about risk, they may immediately think about loss. But it may be more beneficial to think about risk as the degree of uncertainty you are willing to overcome (through education and research) to achieve potentially greater returns.⁷ A main reason some investors miss out on great returns has been discomfort with volatility.

Time horizon:

Look at how individual investors develop their portfolios for long-term returns versus market timing with “hot stocks.” A person’s age should be taken into consideration,⁸ as well as determining when you will need the money.

Personal goals:

Are you seeking current income from your portfolio? If so, you may want to explore value stocks. Most growth stocks don’t pay dividends because they prioritize future growth potential by reinvesting profits back into the business to generate more growth.¹ Do you want more stable, predictable growth? Are you willing to trade in comfort for extreme growth? When will you need a return on your investment? These are all questions to consider when developing your personal goals.

Diversification:

Although many investors favor one investing approach over the other, it’s important to realize that both value and growth stocks can play a strategic role in a portfolio. You don’t have to choose one or the other. You can create an investment strategy that captures the benefits of both strategies. For example, investors can look into “growth at a reasonable price” (GARP) to unlock a combination of value and growth investing.⁹

For new investors, there’s an opportunity to pursue these different styles of investing through mutual funds or exchange traded funds (ETFs). Both of these offer a way to purchase a basket of equities that focus on growth or value funds.