Growth stocks have been on a tear over the past several years. However, traditionally value stocks have been the big performers over the long-term. But with the rapid rise in growth over the last 10 years, are value stocks still worth it? Today we explore the question: can value stocks still outperform in today’s environment? We’ll look at the data, provide you with the information, and then lay out action steps that you can take to act on what you learn.
What are Value Stocks?
Before we begin to explore our question we need to clarify the difference between growth stocks and value stocks. Growth stocks typically are faster growing, more expensive, and have a lower dividend yield. They are stock names you hear about on the news: Facebook, Tesla, and Google, to name a few. Value stocks typically have slower growth, are cheaper, and have a higher dividend yield. These stocks are viewed as being discounted to the “fair value” of the company and include names like Berkshire Hathaway, JP Morgan, and Wal-Mart.
Is this time different?
Let’s look back at history to compare the two types of stocks. From 1926-2010 value stocks grew 12.4% per year whereas growth companies returned 9.8% per year. However, the last ten years have been very different.
Over the last 3 years, growth stocks have outperformed value stocks by 21% per year. This is the highest 3-year difference on record. Which begs the question, is this time different? Listen in to hear about a similar time period in history.
Can you really compare this new economy to the 1998-2000 economy?
Much of the growth that we have seen over the past 3 years has been driven by FAANG stocks (Facebook, Apple, Amazon, Netflix, Google). It seems like these stocks could keep growing forever without any competition. And most recently they have all accelerated their growth with the Covid situation. On the flip side, value stocks have been hit hard by the pandemic.
But are the growth stocks becoming overvalued? Will this growth end up collapsing like the tech bubble of the late 90s?
How do we adjust our investment strategy?
Do you have an investment strategy? It is important to implement a disciplined, rules-based process. Have a process, have a plan, and stick with it. At the end of the day, investor behavior is the key to success.
We’re not saying that you shouldn’t own growth companies, we simply recommend a using diversified approach. We like to say that something in your portfolio should always stink. What does your investment strategy look like? Do you have a hard time hanging on to the losers?
If you are interested in working with a professional to help you come up with an investment strategy, consider using a fee-only financial advisor. Learn what makes fee-only financial advisors different by visiting our website.
Outline of This Episode
- [1:43] What are value and growth stocks?
- [7:12] Why has growth outperformed value by so much over the past 3 years?
- [12:25] How can you compare this new economy to the 1998-2000 economy?
- [14:10] How do we adjust our investment strategy?
- [17:18] Today’s progress principle
Resources & People Mentioned
- Dimensional – Value vs. Growth Webinar
- Efficient Frontier – Who Killed Value?
- Dimensional – Price to Book Ratio between Value vs Growth
- Financial Symmetry – Where’s the Value?
Connect With Chad and Mike
- Connect on Twitter @csmithraleigh@TeamFSINC
- Follow Financial Symmetry on Facebook