Although there’s nothing trendy about investment styles, it pays to understand the differences between growth, value and blend when choosing investments for your portfolio. Investments labeled as value and growth tend to take turns outperforming each other, and the blended style is exactly that – a blend of growth and value.
It’s nearly impossible to predict which style will deliver better market returns. In general, growth stocks have dominated Wall Street during market booms while value stocks have attracted more attention during market declines. Past performance, however, is not an indication of future results.
Investments classified as growth tend to focus on long-term appreciation. A growth stock fund typically invests in well-established companies with above-average prospects for long-term growth. These companies usually have track records for fast-growing sales and profits measured by earnings growth rates, return on equity, book value and cash flow. Earnings are usually reinvested into the company for research and development rather than paid out as dividends.
Growth stocks earned an average 14.66% over the past 10 years as measured by the Russell 3000® All Cap Growth Index, experiencing significant ups and downs along the way. Growth-style investing tends to be more aggressive than value-style investing, so stock prices have potential for large gains and losses.
Value stock funds, on the other hand, typically invest in companies believed to be undervalued – companies that have been overlooked by the market, those experiencing temporary setbacks or showing potential for turnaround in an industry that’s currently unpopular. Value investments are purchased at bargain prices in relation to their earnings, dividends, cash flow or book value, with the expectation that the value will go up.
Over the past 10 years, value stocks have returned an average 11.29%. Because value stocks are already “cheap,” they may be less vulnerable to market downturns than full-price stocks. Value stocks often pay dividends, which also helps cushion falling prices.
Because growth and value investments don’t always share the same ups and downs of the market, it can make sense to invest in a balance of the two or consider blended investments. Keep in mind that blended funds may lean more heavily toward growth or value, so be sure to research your options before choosing investments.
Also avoid getting swept up in the current popularity of one investment style or the other. Instead, make investment selections based on your unique goals, timeline and risk tolerance. An honest assessment of your portfolio by an objective investment professional can help you feel confident that your investments are working for you and will serve you well no matter what the future brings. You can rely on the expertise and experience of your Seaside National Bank & Trust Client Advisor. Schedule a portfolio review today.
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