Value and growth stocks are sort of like the tortoise and the hare. One is more of a roller coaster adventure while the other is more like a long, boring vacation ride. In this article you’ll learn about the two and understand which one you should own in your portfolio.
You have 2 investments to choose from:
- Investment A has earned 10% per year over the last 10 years.
- Investment B has earned 17% per year over the last 10 years and was slightly less risky than Investment A.
Which investment do you choose?
Investment B represents large company U.S. growth stocks (Russell 1000 Growth) over the last 10 years (July 2010 – June 2020) and I wouldn’t blame you if that was your choice. After all, who wouldn’t want more return with less risk.
In my experience over the years, investors tend to gravitate towards investments like Investment B. These type of investments include exciting names such as Facebook, Apple, Amazon, Netflix, and Google. In fact, the stocks I just mentioned are famously known as FAANG stocks (acronym).
Investment A represents large company U.S. value stocks (Russell 1000 Value), and includes less exciting names such as Johnson & Johnson, JP Morgan, Walmart, Home Depot, and Proctor & Gamble. But don’t let these “boring” names fool you. As you’ll see in a moment, they provide some serious value (no pun intended) to investors.
Which Investment Should You Own?
While Investment B provided more return (17% per year) for less risk over the last 10 years, you CANNOT and SHOULD NOT choose an investment just based on one 10-year time period.
Even though the most recent 10-year performance was phenomenal for large company U.S. growth stocks, the prior 10-year period (July 2000 – June 2010) tells a different story with a negative 5.00% per year return. Quite a roller coaster ride, huh? Value stocks over this latter period at least returned a positive 2.38% per year.
Don’t be fooled by the recent outperformance of large company U.S. growth stocks. If you look at the combined performance of both time periods (July 2000 – June 2020), you’ll discover that large company value stocks outperformed annually (0.87% per year). Furthermore, in my article, Beware Large Cap Growth Stocks, you’ll see that large cap growth stocks underperform its peers a very high percentage of the time.
It’s not a matter of which one you should own in your portfolio. Instead, it’s a matter of how much of each one you should own. Growth stocks definitely have a place in your portfolio for protection purposes. You don’t know when growth stocks will outperform over any given time period, so it is wise to own them. However, in my opinion, I think that you should own a higher percentage of value stocks due to their long term historical outperformance at less risk!
Many Types of Value Stocks (and Growth Stocks)
So far, my anecdotal evidence was centered around large company U.S. growth and value stocks. However, the evidence also supports medium and small company U.S. value stocks. In fact, the outperformance of value over growth for medium and small companies is even greater than for large companies (2.70% per year and 2.31% per year respectively).
In other words, there’s more than just large company U.S. stocks out there. Be sure to include some small and medium-sized stocks in your portfolio and own more value than growth. A word of caution: Be sure to invest for the long haul. As we have seen over the last 10 years, growth stocks have significantly outperformed value stocks. You MUST be invested long enough to hopefully take advantage of the value premium. And when value has historically turned around, it does so very quickly, so you must be present to win.
If that weren’t enough, here is some additional evidence from DImensional Fund Advisors supporting value stock outperformance. Since 1928, value stocks have outperformed growth stocks by 4.54% / year on average (not annualized). This is not a guarantee of what will come, but instead an idea of what history has shown us. Put the odds in your favor by owning some value!
I hope that you have found this article helpful. If you’ve read the whole article, I have two questions for you. Do you have too much exposure to large company U.S. growth stocks and if so, what will you do about it? Please share your thoughts in the comment section below.
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CERTIFIED FINANCIAL PLANNER™