Growth or value: Which investment philosophy is for you?

We explore two of the most popular investment strategies and which is better for you

Value vs growth investing: Which investment philosophy is for you?

Value investing: The gospel of value investing is fairly simple: price is paramount. Value investors identify companies that the market is underestimating, and like savvy shoppers, buy them at a discount. The mantra is that if you can get the stock at a lower price, why pay more? Hence, they identify undervalued stocks, hold them for a long time, and wait for the market to realise their true worth.

Growth investing: In growth investing, pricing takes a back seat. Growth investors believe that earnings should take precedence over pricing when selecting a stock. They look for companies with a long runway for growth and that have performed exceptionally in recent years in terms of earnings. Even if these stocks are trading at a high price, growth investors argue that their strong earnings history makes them an attractive investment.

Value investing vs growth investing: Which one is better?
The truth is that there is no one-size-fits-all investment strategy. A value stock that you have held for years might end up being a dead-end, while a growth stock with strong earnings might go down due to a sudden shift in market sentiments. One should also note that growth stocks tend to outperform value stocks when the economy is doing well. And when the economy is in the doldrums, value stocks tend to hold up better.

Your investment strategy should depend on your risk tolerance and investing goals. Investing philosophies should act as a guide rather than stringent rules.

What should you do?
We believe your investment philosophy should be a mix of both. You should avoid the extremes of both philosophies and have a mix of both growth and value stocks in your portfolio.

  • Investments in value stocks need time to come to fruition. This also means you have to withstand years of market volatility. However, value stocks are often relatively low risk compared to growth stocks. If you have a low-risk appetite and can stomach years of volatility, your portfolio should lean more on the value side.
  • Growth stocks can provide market-beating returns faster than value stocks. However, this potential for rapid growth comes at the cost of higher risks, especially if the expected growth is not realised. If you do not want to sit through years of volatility and have a higher risk appetite, growth stocks should be the larger chunk of your portfolio.

How do you identify growth and value stocks?
Here are some parameters you can use to identify growth and value stocks.

Suggested read: Growth, value and you

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