Growth vs. Value Stocks tend to be the investment of choice for long-term investors because, historically, they have been far more effective than bonds or cash at providing the powerful returns needed to overcome inflation and build wealth over time.
To a large extent, more risk is the price you pay to pursue greater returns. However, if you're investing for the long-term and want to emphasize stocks in your portfolio, you may still help manage volatility by diversifying with different types of stocks. Specifically, you can include both major styles of stock investing: "growth" and "value."
Growth
Growth managers generally look for fast-growing companies that have demonstrated records of above-average growth. They believe the growth rates of these companies will allow them to outperform the stock market over time. Growth stocks tend to carry high price tags relative to what they are currently earning. The market is willing to pay more for them because they are leading companies with the potential for powerful, consistent earnings growth, and may therefore be worth considerably more in the future. The job of growth stock managers is to determine if a stock's price is justified, based on the company's potential for expansion.Value
Value managers look for stocks that are bargains based upon certain valuation criteria. They believe that the true value of a stock is not reflected in its price, and, over time, its price will increase faster than stocks that are fully-priced. In general, the value style can be a more conservative approach to stock selection. Value stocks tend to be inexpensive relative to what they are currently worth. The market isn't willing to pay more for them because they're from companies that are out of favor for some reason or another. The job of value managers is to identify companies poised for a turnaround, leading to rising earnings and higher stock prices.Both styles have their proponents, but neither has been shown to provide consistently higher returns than the other. What's important for stock investors to know is that both styles tend to run in cycles. One style may be in favor for a couple of years while the other is out of favor. Diversifying to include both among your stock holdings may help manage the overall volatility of your portfolio over time.
