Growth Stocks or Value Stocks: Which is Best?

It is probably the oldest debate on Wall Street, the debate as to whether growth stocks or value stocks are the best way to invest in the stock market for the average investor. No doubt this debate will continue to rage on for many years to come as well, since there are many different mindsets about which types of stocks are the best investment.

A growth stock is the stock of a company that is expected to grow at an above-average rate relative to the overall market. Growth stocks typically pay little or no dividend, but generally bring a high return on equity and reinvests retained earnings into future capital projects that will help the company be even more profitable. A value stock is defined as a stock that is seen as trading at a low level versus its fundamentals and thus is considered to be undervalued by the stock market. Value stocks usually are more mature companies that pay a healthy dividend and have a nice amount of cash on their books.

Have growth stocks or value stocks performed better historically? Here is another strongly debated topic, because both growth and value stocks have had their years where they outperform in a big way, but in the long run it seems that the two seem to more equal than many would expect. During bull market periods a growth stock tends to outperform, but when the market and the economy contract the value stocks tend to take over as the leadership group.

The single most important thing that an investor should understand about deciding between value stocks and growth stocks is that you truly do need a mixture of the two. You simply cannot have a diversified portfolio without having both growth stocks and value stocks, and diversification is an absolute must in the stock market.

Some of the best investors of all time have decided to take a hybrid approach to investing in stocks, and have found great success in using such a method. Peter Lynch is probably the most successful mutual fund manager ever, and he is well-known for his growth and value hybrid investing style. In fact, one of my favorite investing terms was made popular by Peter Lynch. Growth at a Reasonable Price, or GARP, is all about finding stocks that are growing, but are still of value. The PEG ratio is extremely important to investors who want to find growth stocks that also may be trading at a reasonable price. Warren Buffet is typically seen as a value investor, but he certainly has added some names that are also growth plays through the years.

Depending on your own personal situation you may want to be skewed more toward growth or value stocks. For example, if you are young and retirement is 25 years away, you’ll probably want to take more risks and invest in plenty of growth stocks. If you have very little risk tolerance, or you are near retirement, you’ll want to stick to the most basic value stocks that pay a healthy dividend and allow you to sleep comfortably at night. In the end the investor who can build an impressive portfolio with a combination of value and growth stocks will likely be ahead of the pack.

[Article Source: Jacob Lindahl]