Value stocks and growth stocks tend to take turns leading the market. It’s easy to get caught up in the vagaries of the market, but investing is not about which asset class is ahead at one point in time; it’s about the long-term ride.
You may recall that in the late 1990s and early 2000s, growth stocks-particularly technology – and Internet-related issues-dominated the market. Value stock managers were considered to be dinosaurs by pundits shouting that a “new paradigm” had replaced long-standing investment valuation techniques. In March 2000, however, the bubble burst, and value stocks began outperforming their growth counterparts.
Value and growth are countercyclical
We see this time and time again, as value and growth are typically countercyclical. That means they tend to outperform during different phases of an economic cycle: In a struggling economy and in the early stages of recovery, value stocks have historically outperformed growth stocks. It isn’t until late in the recovery cycle that growth has typically dominated.
Knowing this, many investors try to time the market, shifting their assets from value to growth and back again when they think the time is right. But timing the market this way is difficult. A better option may be ensuring that your equity portfolio is balanced. Investing in a combination of both value and growth stocks gives you the best odds of success. This is because a portfolio containing investments in both stock types weathers the ups and downs of the markets better than an all-growth or an all-value portfolio does.