Two well-regarded strategies are growth investing and value investing. Each approach has definite financial advantages.
When you invest in a mutual fund or exchange traded fund (ETF), you’ll get information about the particular fund’s investment strategy or style. An investment strategy is simply a set of guiding principles a fund manager uses to choose the particular stock or bonds in which they’ll invest.
Two well-regarded strategies are growth investing and value investing. Each approach has definite financial advantages. However, the two investing styles can also complement each other fairly nicely. As a result, one way to diversify your portfolio might be to invest in both growth-and value-based funds, or in funds that combine the two investment styles.
Growth- or value-oriented funds typically include the words “growth” or “value” in their names. Funds that combine the two styles are “blended” funds and may include that term in their names.
Here’s what you need to know about growth and value investing strategies.
This strategy primarily focuses on investing money into what are known as “growth” stocks. Often, growth stocks are found in industries such as technology. These equities are:
- Expected to grow at a faster pace than the overall market
- More focused on reinvesting profit to grow the company instead of paying dividends
- Generally in industry groups most associated with the potential to succeed from the development of new and transformational products or services
Growth stocks also tend to be:
- More expensive than peers within an industry group and/or the broader market
- A bit more volatile (risky) than the average stock
Fund managers or investors who follow this strategy focus on putting money into “value” stocks. Value stocks generally trade at a discount relative to an investor’s interpretation of fair value and may include companies in slower-growing industries. These stocks are:
- Generally those of companies that may not be currently popular among average investors
- May be slow to appreciate in share price, but may pay dividends
- Tend to be in older, more established industries
Value stocks also tend to be:
- Less expensive relative to peers within an industry group and/or the broader market
- Associated with companies that may be considered contrarian or turnaround situations
Not necessarily. Growth and value stocks—and therefore the investing styles that focuses on them—each tend to take turns leading the market. Growth stocks typically do best when companies are showing strong profits and interest rates are falling. On the other hand, value stocks tend to perform better shortly after an economic market goes into recovery mode.
Depending on your particular financial goals, how long you’ll invest your money, and how much risk you’re willing to take on, there may be room for both growth- and value-style funds in your portfolio.