Red wine or white? Paper or plastic? Value or growth?
Our daily lives are full of choices, and they tend to be
presented as though they're either-or. But while you might
not want to chat up your boss at the holiday party with a
glass of chardonnay in your left hand and a glass of merlot
in your right, when it comes to investing, you should imitate
your favorite toddler.
Value or growth? Both!
Just say yes
It's true that classic "value" stocks such as
Pfizer (NYSE: PFE) and
AT&T (NYSE: T) rarely have the rock-star
growth of growth stocks, and classic "growth" stocks such as
Apple (Nasdaq: AAPL) and
Amazon (Nasdaq: AMZN) rarely look "cheap."
But wouldn't you like to have both? The margin of safety that
value investing provides, along with the unimaginable upside
of a great growth stock?
There are two reasons why you shouldn't have to
choose.
For starters, it's a false dichotomy
The distinction between value and growth stocks is such
a bedrock assumption that Morningstar routinely classifies
stocks, mutual funds, and ETFs as one or the other -- and
many funds and ETFs follow suit.
The
iShares Russell 1000 Value Index (IWD), for
instance, features such stalwarts as
Johnson & Johnson (NYSE: JNJ),
Procter & Gamble , and
Intel .
Its growth compatriot, the
iShares Russell 1000 Growth Index (IWF), on
the other hand, features in its top holdings companies such
as … Johnson &
Johnson, Procter & Gamble, and Intel.
Huh?
This just goes to show that the same company can be both a
growth
anda value stock. Value investing, after all, wants
to buy companies selling at a discount to their intrinsic
value. Growth investing wants to buy companies that will grow
their bottom lines -- and presumably your investment -- many
times over. But there's nothing excluding fast-growing stocks
from being undervalued. That's why Warren Buffett himself
said that "growth and value investing are joined at the
hip."
Putting the puzzle together
What gets lost in the "value vs. growth" debate is
this: You shouldn't be buying only one stock anyway. You
should be building a portfolio. And that portfolio should be
-- say it with me now -- diversified.
One premise of diversification is that different kinds of
stocks do better in different market environments. Putting
together assets that don't move in the same direction at the
same time will create the best chance for high returns with
lower overall volatility. Notice how each of these different
investment classes go into and out of fashion at different
times:
Year
Large Caps
Small Caps
International
REITs
1972-1979
5.1%
19.5%
11.1%
10.5%
1980-1989
17.5%
17.0%
22.8%
15.6%
1990-1999
18.2%
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