Value or Growth Investing: Which is Better?
There is no right way to invest in the stock market. Interested market participants have historically used different investment strategies to select the best possible securities for their portfolios. These strategies vary according to the objectives, financial capacity and risk profile of each investor.
Of the many investment techniques available, value investing and growth investing are very popular among investors. By choosing the strategy best suited to their needs, investors can make all the difference to their portfolios.
But how do you know which route is the best option for you under current market conditions? Well, to decipher that, let’s see what each strategy entails.
What is value investing?
Every stock listed on the market has an intrinsic or true value determined by fundamental analysis. In some cases, the market price of listed stocks tends to be lower than its intrinsic value, making them undervalued. Over time, market participants expect the prices of these stocks to rise, reflecting their intrinsic value and leading to capital appreciation for the investor.
This approach encapsulates what value investing is all about. This involves identifying undervalued stocks and investing in them today so that when prices correct to reflect intrinsic value later, the investor can profit from the price movement.
Value investing can be beneficial in many ways, but requires due diligence on the part of investors to make it successful.
Benefits of value investing: It is a low risk, high reward strategy; taps into the power of compounding; suitable for investors of different income groups; increases your exposure to blue chip companies.
For this approach to be successful, you need a lot of patience, a thorough understanding of the company you’re investing in, and the know-how to estimate the correct intrinsic value of stocks.
What is growth investing?
Growth-oriented investors look for stocks that have the potential to be above average. They believe that if a stock has grown tremendously over the past few years, it will continue to do so in the future as well. Thus, their investment strategy is to invest in companies with a track record of performance and growth.
These stocks may be emerging or young companies, but the critical element is the potential for significant growth in the future. Shares of these companies may already be priced high, but growth-oriented investors often expect prices to rise even further, leading to gains.
Growth investing has its advantages, but there are a few factors an investor should consider when implementing this strategy.
Benefits of growth investing: The potential for high returns is greater; no need to assess the intrinsic value of a company; diversify your portfolio across sectors; this strategy can help you fight inflation.
Things you need to keep in mind: You must identify the right actions; the risk of underperformance of the stocks selected may be high; the level of price volatility of these stocks is also high.
Value investing vs growth investing: which way to go?
As you can see, the two investment strategies described above are quite different in their approach. Value investing focuses on fundamentally sound companies that are priced lower than they should be. Meanwhile, growth investing revolves around companies with high future potential for price increases, even if the price is already relatively high.
How do you know which route is the best option for you? Value investing is best suited for investors cautious about risk taking, as it relies primarily on the fundamentals of the companies invested in. However, if an investor is comfortable taking on more risk in the trade-off for above-benchmark gains, then growth investing is the right strategy.
If you’re still unsure which side you’re on, you can always talk to a financial planner or investment advisor for help. These experts can guide you through different investment strategies and help you choose the right approach based on your financial goals and ability.