Investing 101: Growth vs. Value Approach to Investing
By Todd I. Youngdahl, CFP®
Comparing growth and value stocks is like a shiny new candy-apple red sports car versus an old reliable beat-up sedan. Growth stocks are those hot picks your uncle is always telling you to buy, skyrocketing to superstardom with no end in sight. On the other hand, value stocks are those old tried-and-true stocks, no hype, no fuss. So, which one is better for you? At Washington Wealth Advisors, we believe both can be a part of a healthy investment portfolio.
We all know the hot-growth stocks in the market right now. FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google) grab headlines daily with new phones, new algorithms, and new streaming content. But what is a growth stock other than flashy news stories? Stocks that are rapidly rising and poised to expand even more in their industry are considered growth stocks. These stocks could have higher volatility, and little to no dividends as most of the profits are put back into the company for more expansion. Growth stocks do better in bull markets and a more robust economy. For growth stocks, it’s all about the potential of a company.
Value stocks are established companies that are undervalued for many reasons and are considered a bargain. The price of the stock is low compared to the fundamentals of the company. Perception is the name of the game for value stocks. For example, a scandal or falling short of forecasts can pull down a company’s price even though its fundamentals are strong. Value stocks tend to be dividend-paying stocks from well-established companies.
A Value Stock Superpower
But ultimately, investors should buy a healthy business and not trendy or untrendy stocks. We know you don’t have the time to research every asset in your portfolio, looking at P/E, P/B cash flow, ROI, or any other analyst jargon. But you do know your time horizon and risk tolerance. While all investments’ goals are for the assets to appreciate, value stocks have an additional benefit of tending to pay dividends. The power of compounding plays a role in value stock appreciation. As you receive a dividend, you can reinvest it and buy more shares. Next time the dividend rolls around, the same thing happens over and over again. Ultimately, you will have a larger holding of a value stock that will hopefully appreciate over time.
At Washington Wealth Advisors, we build a portfolio based on your objectives, needs, and time horizon—not trends. Every portfolio should have a growth component, even in retirement, to hedge against inflation. The specific allocations depend on each individual’s unique goals. Depending on your portfolio’s size, it may be beneficial to include allocations of both value and growth mutual funds, ETFs, or individual holdings.
However, it’s not all about the stock market; it’s about having a solid plan. Our goal is your financial well-being, and our decision-making takes into consideration who you are and what your goals are. We would love to partner with you to help decide which investment approach is best for you. To set up a meeting, call our office at 703.584.2700, email firstname.lastname@example.org or schedule online.
Washington Wealth Advisors is a fee-only registered investment advisory firm serving busy families, executives, women building wealth, and small business owners. We provide Wealth Advisory Services—financial planning coupled with asset management—guided by a personalized investment strategy based on each client’s unique goals. Our unbiased advice, independent approach, and proactive investment management help to support our clients’ overall financial peace of mind.