Is it better to invest in value or growth? (2024)

Is it better to invest in value or growth?

For example, value stocks tend to outperform during bear markets and economic recessions, while growth stocks tend to excel during bull markets or periods of economic expansion. This factor should, therefore, be taken into account by shorter-term investors or those seeking to time the markets.

Some studies show that value investing has outperformed growth over extended periods of time on a value-adjusted basis. Value investors argue that a short-term focus can often push stock prices to low levels, which creates great buying opportunities for value investors.

Growth funds are good for individuals who are looking for capital appreciation and steady long-term growth. People who want a regular income should go for value funds.

Value premiums have often shown up quickly and in large magnitudes. For example, in years when value outperformed growth, the average premium was nearly 15%. On average, value stocks have outperformed growth stocks by 4.4% annually in the US since 1927, as Exhibit 1 shows.

(1994) (LSV) report that value betas are higher than growth betas in good times but are lower in bad times, a result that directly contradicts the risk hypothesis. DeBondt and Thaler (1987) and Chopra et al. (1992) find similar evidence for the reversal effect, an earlier manifestation of the value premium.

Value stocks have consistently underperformed growth stocks for many years. Yet, there are some signs that 2024 could herald a change in trend. Underperformance in value stocks was exacerbated in 2023 as many growth stocks, in the tech sector, saw huge gains due to excitement around artificial intelligence (AI).

Growth investing, however, has been shown to outperform value investing more recently. One recent article noted that growth investing had outperformed value investing over the last 25 years. Since 1995, value mutual funds have returned 624%, while growth mutual funds have returned 1,072%.

Value stocks have more limited upside potential and, therefore, can be safer investments than growth stocks.

Is value investing obsolete?

Reality: While bull markets often see a surge in growth stocks, it doesn't render value investing obsolete. Even in robust markets, undervalued companies exist.

Value stocks are considered relatively less risky compared to growth stocks. They are typically more stable and have lower volatility.

Yes, particularly if you want to survive economic setbacks. The core of the long-term value investing approach is identifying well-financed companies that are well established in their businesses and for the most part have a history of earnings and dividends.

Looking back at the recessions of 1980, 1982, 1991, 2001, and 2009, we find growth tends to outperform value in the 12 months prior to a recession through to the trough of the recession. As the economy exits a recession, value tends to outperform growth.

Growth stocks generally perform better during bull markets, when interest rates are falling, and when corporate earnings are trending up. However, during economic slowdowns, growth tends to lag behind value. Similarly, value tends to outperform growth during bear markets and in the early stages of economic recovery.

Against this backdrop, here's why high-quality AI-powered stocks such as Nvidia (NVDA 3.73%), Super Micro Computer (SMCI 4.57%), Snowflake (SNOW -0.40%), Palantir Technologies (PLTR -1.00%), and UiPath (PATH -0.42%) can prove to be smart buys in 2024.

We expect lackluster global earnings growth with downside for equities from current levels.” Against this backdrop, value stocks have a strong chance of outperforming their growth counterparts in 2024.

As a whole, analysts are optimistic about the outlook for stock prices in 2024. The consensus analyst price target for the S&P 500 is 5,090, suggesting roughly 8.5% upside from current levels.

Apple remains a king in consumer tech, with growth catalysts in several other lucrative areas of tech. The company's dominance and significant cash reserves suggest it won't take tens of thousands of dollars to see a considerable return from an investment in its stock.

How many years has growth outperformed value?

Value has a long track record of outperformance, dominating the period between 1970 and early 2007 on a cumulative basis. By contrast, Growth prevailed from mid-2007 until the COVID-19 pandemic, when Value started to outperform again.

Again, these ratios are often used in a comparative sense, so what's good or bad is often dependent on what you're comparing it against. To give you some sense of what the average for the market is, though, many value investors would refer to 20 to 25 as the average P/E ratio range.

Disadvantages of Value Investing

Any error and one may catch hold of a 'value' trap, which does have lower valuations, but no potential for growth. Value investment requires patience. The waiting period could be in years.

While the product names and descriptions can often change, examples of high-risk investments include: Cryptoassets (also known as cryptos) Mini-bonds (sometimes called high interest return bonds) Land banking.