Investors often wonder whether growth stocks are preferable to value stocks, or vice versa. Although no one can forecast future performance, over the past 10 years, value stocks provided an 11% average annual return, and growth stocks provided a 5.44% average annual return.
So what does this mean for the growth and value stocks in your portfolio? Is it time to ditch your growth stocks in favor of value stocks? Not necessarily. Investing fads come and go, but a diversified strategy involving growth, value, or a combination of the two can be a great addition to your investment portfolio.
Room for Growth
Growth companies are so named because they have the potential for future growth. These companies typically have both a strong history of growth and strong projected growth. Their stocks tend to be expensive relative to what they are earning and thus tend to have a high price-to-earnings ratio.
Growth stocks typically do not offer dividends because many companies reinvest their profits. However, growth companies may be on the verge of a major breakthrough that could drive up their share prices dramatically. Growth stocks carry significant risk, which should factor into any purchasing decision.
Looking for Value
Value stocks are considered to be undervalued by the market and thus trading below their true value. Many of these companies are established firms with solid earnings. Investors buy value stocks hoping that the market will eventually realize the true value of these companies, elevating their share prices in the process.
The return and principal value of stocks fluctuate with market conditions. Shares, when sold, may be worth more or less than their original cost. Diversification does not guarantee against loss; it is a method used to help manage investment risk.
Many financial professionals tout the benefits of investing in both growth stocks and value stocks. Let us help you look at your own financial needs and decide on a strategy that will work for you.
