January 27, 2022

Growth vs. Value

Max Martin

Over the past ten years, growth stocks have outperformed value stocks at the greatest rate in market history. Observing a trend like this over a decade can lead investors to abandon their diversified portfolio and move heavily into growth stocks in an attempt to avoid missing out on high returns for any longer. However, even during a historic trend, past data demonstrates the importance of keeping a diversified portfolio when it comes to growth and value stocks.

Growth vs. Value Outperformance

One thing that has been proven in study after study is that it is nearly impossible to successfully time the market. The same can be said about timing sectors of the market such as growth and value. While growth stocks have been on an unprecedented outperformance streak, the same could have been said for value stocks before 2010. Shifts in outperformance have historically started and ended unpredictably, and there is no reason to believe this will change moving forward. The only way to be prepared for these unpredictable and often rapid shifts is to keep your portfolio diversified, even when trends and doubts bubble up.

Not only is it important to diversify your portfolio between growth and value stocks, but investors also need to consider diversification within these asset classes. Different value or growth funds hold different stocks depending on their own definitions of growth and value. For example, value funds hold stocks with a wide range of price-to-book ratio, and these differing ratios correlate to differing performance during time periods where value outperforms growth.

How investors choose to diversify their portfolios is largely dependent on their individual goals. However, the need for a certain level of diversification is constant for all investors regardless of short-term trends in the market. Diversification across asset classes such as growth and value can help portfolios to achieve maximum growth with minimum risk and volatility. For more information on the importance of diversification, and to see how we can help you achieve your financial goals, visit our website www.kdminvest.com.