6 Min Read | Updated: February 16, 2024
Originally Published: October 1, 2021
Growth vs. Value: Identifying the Right Investment Approach For You
Understand the difference between growth and value stocks to determine which investment style aligns with your goals.
At-A-Glance
Growth companies are expected to produce above-average returns and outperform their peers because of their distinctive advantages in the marketplace.
Value companies are believed to be bargain stocks that have the potential to produce a high return later when their true value is unlocked.
Determining whether a growth or value stock investing strategy is the best decision for you depends on a few key factors: personal goals, risk tolerance, and time horizon.
Investing in the stock market can be one of the simplest ways to build wealth and combat inflation over the long term.1 Since the S&P 500’s inception, data indicates there has not been a 25-year period when it has consistently delivered a negative average return.2 Although past performance does not guarantee future success, the stock market has shown itself to be an ideal place for investors to park extra cash and maximize long-term wealth potential.3
Investors who want to leverage opportunities in the stock market may want to focus on identifying the right investment approach for their portfolio instead of trying to find the perfect time to invest. Despite a poor performance in 2022,4 2023 saw a positive rate of return.5
Although the stock market is susceptible to uncertainty and turbulence, investors can generally still realize great long-term gains. But a perennial debate is still in session: Will investors focused on value or will those bullish on growth fare better in the long term?
Let’s explore the differences between growth and value investing. Then, we’ll provide important considerations to help you make appropriate decisions for your portfolio.
What Is Growth Investing?
The definition of a growth investment can be summed up in two words: extraordinary potential.1 Growth investors seek to buy companies that have the potential to go above and beyond the average performance of the market and produce strong earnings and share price performance. Typically, these companies are on a mission to transition from starter businesses to market leaders as quickly as possible.
Characteristics of growth stocks include:6
- Growing consumer base.
- Competitive industry advantage.
- Low or no dividend payouts.
- Wild price swings.
- Higher-than-average price-to-earnings (P/E) ratio.
Since growth companies focus on rapid market results, they reinvest money back into the company, giving shareholders a chance to benefit from capital appreciation when they sell their shares in the future.6
If you’re looking for growth stocks to add to your portfolio, you’ll typically find them in industries that are growing fast and in spaces that are ripe for disruption.6 Technology and biotech are two common growth sectors. Many of these stocks are listed on the NASDAQ exchange.
What Is Value Investing?
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
- Seeming to be undervalued.
- Low P/E ratio.
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.
Historical Performance: Growth vs. 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.
Value vs Growth Investing: What’s Best for You?
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.
The Takeaway
There are pros and cons to both value and growth investment. But they both give you access to one of the greatest wealth-building opportunities of our time: the stock market. Understanding how both investment strategies can play a role in your portfolio can allow you to maximize the benefits of being an investor.
1 “What are stocks?,” Investor.gov
2 “S&P 500 Total Returns,” Slickcharts
3 “5 Keys to Investing Success,” CT.gov
4 “S&P 500 Annual Total Return,” YCharts
5 “S&P 500,” S&P Global
6 “Investment Products: Stocks,” FINRA
7 “Risk Tolerance,” NIST
8 “Investing for Older Investors: Mutual Funds, Stocks and Bonds, Oh My!,” Investor.gov
9 “Growth Investing with a Value Twist,” NASDAQ
Charlene Rhinehart is a freelance writer, author, and Certified Public Accountant with more than a decade of experience in financial services. Her work is featured in several publications, including Black Enterprise.
All Credit Intel content is written by freelance authors and commissioned and paid for by American Express.
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