A Well-Balanced Portfolio Should Include Growth and Value

By Jane Young

Diversification is a key factor in achieving investment success. A diversified portfolio should be invested in a mix of interest earning and stock-based investments.  It should include securities from companies of different sizes, in different geographies, and in different industries. Diversification can also be gained by investing in companies in different market sectors that fall into different stages of the corporate lifecycle.  Strive for a combination of stock in newer faster growing industries and older more well-established industries. Commonly referred to as growth and value.

Growth and value stocks have both had periods of outperformance.  Value has outperformed over the last century and growth has outperformed over the last decade, up to 2022, when value was the star.  It is impossible to predict how the market and the economy will perform in the future, so it is prudent to hold a combination of both.   The appropriate mix depends on your investment time horizon and tolerance for risk.  

Companies in the growth category, as the name implies, generally experience growth in excess of the market.  They are focused on sales and revenue growth and their products are often in new technologies.  Earnings are invested back into the company to fuel on-going growth rather than paying dividends.  Prices are high relative to current profit in anticipation of strong future growth.   Growth stocks are more volatile and riskier than value stocks due to the strong dependence of growth into the future.   Many growth stocks are in the technology, communications, and consumer discretionary industries including Apple, Microsoft, Tesla, NVIDIA, and Amazon.

Value stocks are generally found in well-established industries and in some cases industries in decline. Value stock have a less expensive valuation than the S&P 500.   They have greater price stability with slower growth.  They are generally found in industries with a strong balance sheet and a proven track record of profitability, where business conditions are more stable. In some cases, there is an opportunity to buy undervalued stocks in companies that are experiencing a temporary set-back.  Value companies commonly use their profits to buy back stock and pay dividends rather than re-investing for growth. Most value stocks are found in the utilities, consumer staples, energy, and financial industries including Johnson & Johnson, JP Morgan Chase, Proctor and Gamble, Chevron, and United Health Care.

Growth stocks offer the promise of faster price appreciation, but they are riskier than value stocks.   Value stock is less volatile but offers slower price appreciation and dividends.  Growth stocks tend to excel during periods of strong economic growth, low inflation, and low interest rates.  Value stocks tend to outperform during economic downturns and during periods of rising inflation and interest rates.

When selecting the best mix of value and growth consider your personal financial situation and risk tolerance.  Maintain a good balance between return and safety that enables you to stay the course during the next major downturn.