Investing in any form can be risky, especially during volatile economic times such as now. We all want to see our portfolios grow, but how can we determine what is the best strategy? Generally, there are two major schools, value and growth strategies.
“Value and growth strategies focus on two different facets of investing,” explains Richard Cayne of Meyer International in Bangkok Thailand. “Growth is often enticing for its immediate results, but value has, well, value as well. And, as always in the investment world, things are never this cut and dry.”
You may ask, why would you prefer value over growth? Wouldn’t you want your investments to both be valuable and grow? Well, these terms are more about certain characteristics of an investment. Value strategies focus on identifying and buying into companies that are currently considered undervalued. Growth strategies turn to investments that analysis points to great potential growth. Usually in the near term.
For many years, investors and analysts have been favouring growth stocks. These are companies that are usually doing very well and have projections for continued growth. With impressive revenue, income, and price-to-earnings ratios, these companies are appealing because they may seem like they are on track to succeed now and into the future.
However, this may be more style over substance if you look deeper into these companies and strategies. Often, the success is from riding the wave of overall economic growth. You can find excellent examples in the tech sector where companies such as Facebook and Amazon seem to be doing no wrong for their investors. But what happens if there’s a slowdown or even a crisis, such as now?
Value stocks are often overlooked because they don’t have headline grabbing growth. They are more modest, but if you look at their overall history, you’ll see that they have steadily performed well. Nevertheless, they may be undervalued by the markets, so those investors focused on this strategy will see them as bargains that will pay off in the long term.
Looking at established companies in the financial and consumer goods sectors such as JPMorganChase or Johnson & Johnson, you’re likely to see that constant performance. Often more risk-averse in their corporate strategies, they have a broader view in their plans that many value investors seek.
Of course, saying that investments fall under growth or value is a great simplification. A company like Microsoft can be said to fall under both categories. And as we’ve discussed in the past, looking purely at numbers does not always guarantee positive results. With the current economic and financial climate around the world seemingly changing every day, it would be prudent to re-evaluate our portfolios.
Some may question whether the time of growth stocks are nearing an end. Others may not be willing to wait for the long-term results from value investing. Should you take the risk and hope that growth stocks will continue to climb? Or should you look for the bargains in value stocks and funds for future success? As always, consulting with a trusted financial expert like Richard Cayne is always advisable. He can help you see past the charts and headlines to determine the best strategy for you.
