Add strategic value stocks to your portfolio now—though take care to not overload with these options—and always consult with a professional adviser for the best course of action to take with your investments. Now more than ever, a steady hand at your financial tiller can prove an invaluable asset.
The Covid-19 pandemic has transformed every aspect of everyday life: personal, social, economic, and political. Even as we return to some semblance of normality—with restrictions lifting as global vaccination rates increase—the longevity of this stabilization is still in question.
The economy is slowly rebounding, make no mistake. Pent-up consumer demand for services—rather than just goods—has rippled across the market as restrictions are rolled back. Sectors that may have overcorrected for initial dives have bounced back quicker than planned and even exceeded stock market expectations in some instances. Meanwhile, supply chain concerns still have other industries lagging longer than anticipated. New coronavirus variants (such as Omicron) and rising inflation rates also threaten the recovery achieved thus far.
This has all led to exceedingly irregular market behavior and as markets generally thrive on stability, many investors are concerned. Additionally, the unique factors behind all this volatility have thrown much of the usual calculus about traditional economics and investment into question, leaving investors to assess their options in an unfamiliar landscape. One debate that continues to divide the experts is what makes more sense today: investing in growth or in value?
“The craziest thing about what I see going on in markets is just an absolute tug of war between growth and value investments,” notes Jeff Powell, chief investment officer at Polaris Wealth Advisory Group. “I’ve not seen a market like this in a really long time.”
The Low-Down on Growth and Value Investing
Investors continually question whether investing in growth or value stocks is the smarter move. But for the uninitiated, what’s the difference?
Growth investing focuses on the potential growth of a company. Investors targeting growth look for stocks that are expected to rise in value based upon strong earnings growth in the coming years. A potential growth stock might be valued at $100 right now, but could be worth $200 in just a few years.
Value investing, on the other hand, focuses on stocks that are worth less than their intrinsic value. Investors who purchase value stocks do so expecting their worth to eventually increase again. For example, a value stock may be sold for $30, when in reality, it is worth $60. Once market opinion shifts, the value of the stock will rise back to its original worth.
Inexperienced investors might think that growth investing would outperform value investing during a bull market. Historically, value investing has outperformed growth investing, while taking less risk. As mentioned earlier, the unique instability of the 2020s thus far has challenged much of the conventional thinking about market trends and forecasting.
Which Is Better for Your Portfolio?
Deciding between growth and value investing largely comes down to how far afield you aim to set your sights. Judging from recent trends, growth stocks are currently performing better than value stocks. But value stocks historically prove more reliable over the long term. Investors should weigh both options and find the investment style right for their financial goals.
You may be better off investing in growth stocks if these statements ring true:
- You are comfortable keeping assets in your portfolio and are not looking for quick income. Growing companies typically reinvest their profits back into their business to propel further growth, so they are not likely to release dividends to their shareholders.
- Market volatility does not phase you. Growth stocks move quickly, up and down. An emergent company’s business decisions have a big impact on the value of their stock. Prices can increase rapidly when they experience success. On the other hand, do not be surprised when a turn for the worse triggers an outsized dive.
- You can let your money rest. Growth stocks take a while to appreciate. Oftentimes they hit a few snags on their upward trajectory and can get punished if they disappoint “the street.” Sticking with high quality growth stocks for the long haul can make for a lucrative investment.
- You are confident in your ability to pick winning stocks. When it comes to growth stocks, you need to examine the company’s potential to succeed. You can speculate on a business’s success, but if it does not go as planned, you should have an exit plan to limit your downside.
On the other hand, value stocks may suit you better if:
- You want reasonable income from your portfolio. With the 10-year treasury yielding slightly over 1.6%, many investors are looking for better sources of income. Many are looking to value companies to provide them their needed income, while also providing them the opportunity of price appreciation. With inflation providing a negative real return for treasuries, don’t be surprised to see investors seeking income to place more emphasis in dividend paying stocks. This could push their prices higher from their increased demand.
- You are looking for stability. While any investment in the stock market has some level of risk, value stocks are historically more stable in price than growth stocks. Be careful, when watershed events happen, value stocks can drop as much as growth stocks.
- A historically stronger performance on your investment. By definition, Value stocks are under-appreciated compared to where they have been priced historically. This can happen for a variety of reasons. This price dislocation provides an investor the potential to see significant appreciation in value of their investment. These types of stocks can experience a significant rise in value, making your investment pay off handsomely.
As the year comes to an end, this “tug-of-war” between value and growth investing will continue. However, the consensus holds that value will outperform growth in the long run. As such, investors should consider securing more value stocks for their portfolios at this time.
POLARIS PRO TIP: Don’t over-diversify. If you over-diversify your portfolio, it will perform similarly to an index. Rather, pick out key companies you believe will have success in the long run. And when making these prudent selections, retain a certain sense of agnosticism in your sectors. If a sector in the market is not performing, nor is it viewed to perform in the near-term, it’s ok to not invest in that particular area of the market.
Why Value Investing Makes Sense Now
While growth stocks are exciting and attractive, value investing is a more reliable approach, especially given the current market conditions. Experts hold that today’s inflationary ecosystem is in large part caused by a basic supply-and-demand inequity. The world shut down, and consumption habits were curbed and drastically altered. Countries loosened the lockdowns, and demand came roaring back quicker than producers could churn out product.
As the supply chain crisis eases and the global economy finds its footing again, a number of currently-struggling sectors may quickly rebound to their pre-pandemic performance, if not beyond. As such, now is the hour to strike. Stocks in traditional value sectors—including the infrastructure, banking, pharmaceutical and energy industries—may prove particularly smart investments in the present environment.
POLARIS PRO TIP: Value stocks tend to perform particularly well in an inflationary environment. The whole premise of value investing hinges on a stock being undervalued at the present, when its actual value is much greater. Temporary inflation causes exactly these distortions in market perception. Inflation can also do more damage to growth stocks, cutting into their margins. Keep a close eye on market performance and track inflation rates to see how stocks would be valued.
Add strategic value stocks to your portfolio now—though take care to not overload with these options—and always consult with a professional adviser for the best course of action to take with your investments. Now more than ever, a steady hand at your financial tiller can prove an invaluable asset.
If you’re feeling unsure about the current market and what it portends, reach out to the team at Polaris Wealth Advisory Group. Polaris Wealth can assist with your investment strategy, financial planning, and wealth management, offering a range flexible options to manage your assets. Manage your wealth and secure your future with Polaris Wealth: reach out today!
This website is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Polaris Wealth Advisory Group unless an investment management agreement is in place.
