Growth investing vs. value investing is a classic debate in the investing community. Is it better to pay a premium for companies that aren’t yet highly profitable but are working towards that goal or to buy profitable companies at a discount with the understanding that the market will realize their true value?
It’s more than simply an academic debate. After all, your portfolio returns are dependent on making the right call. And while each strategy has had clear periods of outperformance, over the last decade, one strategy is the hands-down winner.
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| S&P 500 Index | Growth (Annualized Returns) | Value (Annualized Returns) |
| 1 Year | 33.4% | 23.8% |
| 5 Years | 14.5% | 10.3% |
| 10 Years | 13.2% | 7.8% |
$1,000 invested in the S&P 500 Growth Index 10 years ago would be worth $3,450 today, more than tripling your initial investment. $1,000 invested in the S&P 500 Value Index would have still performed quite well, doubling the initial investment, and would be worth $2,110 today, a far cry from the growth investing returns.
During periods of sustained economic strength, as we’ve seen since the Great Recession, growth investing tends to outperform value investing. This is doubly true in recent years as persistent “easy money” policy from the Federal Reserve has left investors chasing appreciation over stable returns or dividends, two areas where value investing excels.
An investment in Altria (MO), for example, would have risen a mere 14% in the last decade, on top of its 8% dividend yield. An investment in Meta Platforms (META) or Apple (AAPL), on the other hand, would have returned over 700% in the same period.
So that settles it, right?
Not entirely.
There are periods during that 10-year run in which using only a growth investing strategy would have left you feeling pretty hopeless as an investor. In 2022, for example, AAPL lost 26.3% of its value while META lost a staggering 64.2%. In that same year, MO lost only 3.6%, which was more than offset by that year’s dividends.
Growth investing offers the prospect of higher returns over the long haul in exchange for higher volatility, both up and down. If you’ve got time on your side, adopting a growth investing mindset can really help you grow your nest egg.
Value investing doesn’t promise those staggering returns, but you also won’t face the significant portfolio swings that growth investors encounter. This is especially important if you’re relying on the income-generating power of your investments.
In fact, most investors would be well suited to adopt a blended approach that includes both growth stocks and value stocks. The growth stocks help drive your portfolio higher during bull markets, while the value stocks add ballast and yield for the lean times.
If you invest via a 401(k), the odds are pretty good that you’re doing this already. After all, it’s what most investment professionals recommend.
If you’re not using a blended approach, it’s worth taking time to make sure your portfolio allocation is truly meeting your needs. Unless you’re deep into your retirement years or just starting your career, going all-in with one strategy or the other is probably not your best bet.
Alternatively, you could always consider a subscription to Cabot Value Investor, where Chief Analyst Chris Preston has adopted a “growth at value prices” strategy that’s designed to get investors the best of both worlds.
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