Choosing Between Two Investing Approaches
By: Miranda Marquit
Updated: October 9, 2019
Investing is one of the best ways to build wealth over time. However, there are many different strategies you can use to make money with investing. Deciding what works for you takes some research and a little tinkering.
Growth and value investing are two common approaches to investing. Here’s what you need to know as you consider how to approach the growth vs. value investing question.
What Is Growth Investing?
For the most part, growth investors focus on better-than-average earnings. They hope to invest in stocks and funds that will likely beat the market. In many cases, these are companies and funds that have some history of growth and have the potential to continue to see good profit growth.
The idea is that if you can identify growth assets, you’ll see solid returns to build your portfolio at a more rapid pace.
Pros of Growth Investing
Potential to grow at a faster rate. Successful growth assets have the potential to appreciate at a rate that beats the overall market.
High earnings growth. Better earnings growth could be possible even during times of economic slowing. Even if the companies are impacted, they could still perform better than other assets.
Chance to invest in emerging assets or companies. You have an opportunity to be a part of something exciting, especially if you focus on emerging growth investments.
Cons of Growth Investing
Potential for more volatility than other investments. Sometimes growth assets have wider price swings than other assets. With the potential for greater and faster growth also comes the potential for bigger losses.
Higher prices relative to the market. When you invest in growth assets, you could end up paying a premium. Prices are often higher, and you have to hope that future gains will be worth the higher current price.
You might not receive dividends. Rather than paying dividends to their shareholders, many growth companies instead reinvest their earnings in growing the company. This can mean better appreciation later, but it also means you don’t receive income from your shares.
Before you adopt a growth investing strategy, it’s important to review the advantages and disadvantages to determine how growth assets could work in your portfolio.
What Is Value Investing?
Value investing, on the other hand, is about trying to identify assets that are undervalued by the market. The idea is to find assets that offer a good bargain. Maybe the company is experiencing a temporary setback but the fundamentals are still strong. Or perhaps it’s a relatively new stock that hasn’t been widely recognized as valuable yet.
No matter how it’s done, value investing is about looking at assets and investing in those that are priced lower than they should be. You invest in them with the hope that they will head higher later as others recognize their value.
Pros of Value Investing
It’s possible to find good deals. Value investing is about finding good deals. You can spend a small amount of money on a stock and potentially see a bigger return down the road.
Risks can be somewhat lower. There isn’t usually as much volatility with some value assets, because they are already lower. And there may not be as much room for big swings.
Potential for consistent gains. Rather than seeing big gains, you have the potential to see steady gains over time. Many long-term and buy-and-hold investors like to take a value-based approach.
Cons of Value Investing
You could lose out on big wins. Value investors run the risk of missing out on larger returns. Whenever you focus on a margin of safety to reduce your overall volatility risk, you wind up potentially missing out on big returns.
Value assets don’t always return to profitability. Even if something seems like a good deal, it can still be problematic. It’s hard to tell when a stock has bottomed out, so it could fall farther. On top of that, you might buy an asset you feel is undervalued only to be stuck when it never sees its potential profits.
There’s a lot of time involved. Looking for the “right” value stocks can take a lot of time and energy. You might put a lot of effort into your research — only to be wrong.
Value investing often looks like the best approach, especially for those who are a little more risk averse. But remember that there are different types of risks. And the tradeoffs made with value investing can also impact your portfolio.
Growth vs. Value Investing — Which Is Better?
One of the most important things to consider when deciding between growth vs. value investing is that one approach is not inherently better than the other. What you choose depends on your own style, as well as the goals you have for your portfolio.
If you hope to amass a larger portfolio in a shorter period of time and see quicker results, a growth approach can work well. On the other hand, if you have a long period of time to grow your wealth and beating the market isn’t one of your major objectives, value investing can be a good way to see consistent returns over the long haul.
Realize, too, that as your portfolio grows and you reach different life milestones, it may be appropriate to switch styles. You don’t have to stick with one approach or the other forever. Instead, you can shift strategies over time. In fact, later on, you may decide that neither growth nor value investing is right for you. Other investing strategies, like income investing, may make sense as you approach retirement or as your goals change.
Combining Growth and Value Investing
Finally, it’s important to note that you don’t actually have to choose between growth vs. value investing. It’s actually possible to incorporate both into your portfolio. You could include some growth assets to help accelerate your portfolio’s growth while still keeping a portion of your portfolio in value assets.
When you use both approaches in your portfolio, you can offset some of the disadvantages of each type of investing. For example, if market volatility is hitting your growth assets, some of your value assets could hold steady and reduce the overall risk of your portfolio during this time.
Additionally, if you’re afraid the value approach won’t allow you to build your portfolio quickly enough, adding growth assets can help you accumulate more earnings. When used together, growth and value investing can actually provide a complementary portfolio construction.
It’s possible to use growth and value asset allocation to meet your goals and shift your allocation as your needs and objectives change over time.
There’s no single right way to invest, and the growth vs. value investing dynamic is no exception. Don’t just try to figure out the one best way to build wealth over time. Instead, think about your own needs and goals. Once you have those in mind, you can figure out what investing approach is likely to work best for you. Research the options to determine what combination of strategies will help you reach your own objectives and grow your portfolio in a way that makes sense for your individual situation.