Value Investing Versus Growth Investing
Defining “Value” and “Growth”
In traditional terms, “value investing” is the purchase of stocks or other securities that are currently undervalued by the market. To make a value investment, an investor must find a security that is being sold for less than what its calculated and/or historical value suggests. Value investing works off a person’s logical expectation that a security will return to a normal price.
On the other end, “growth investing” is the purchase of shares in a company that is expected to grow in importance or become more valuable than it is now. To pursue growth investment, an investor seeks out companies that have excellent potential to expand. The current cost of their shares are not undervalued, their growth has simply not yet been realized. Growth investing is based on the optimistic anticipation of a company’s future.
Difference for Funds
Investors will undoubtedly notice that several funds will either label themselves “value” or “growth.” In general, this reflects the funds volatility: value funds are often less volatile than growth funds. Though growth funds make up for their risk by offering the potential for higher returns, economic downturn can cause them significant losses. Whether “value” or “growth,” mutual funds pursue asset diversification, putting an investor’s risk much lower than if they purchased just a few assets directly.
In recent years, several well-known investors, including Warren Buffet, have stated that the difference between “value” and “growth” investing are arbitrary. A company’s shares might be a good deal because they are undervalued, but an investor is expecting some form of growth or performance to push it back to its normal value. Similarly, if an investor feels a company’s growth is certain, then he or she sees its shares as undervalued at their current price.
The differences between “value” and “growth” are only noticeable if an investor is speculating on growth or continued performance. An experienced and well-informed investor will consider a company’s past and future before purchasing a security. After taking everything into account, it becomes a simple judgment of whether the company’s expected future is worth the current price, market risk and length of time.
Whether choosing a single security or picking a mutual fund, both “value” and “growth” are important for all investors to understand. Unfortunately, it is difficult to know an investment’s details and the market climate without spending hundreds of hours in education and research. If you have questions about your current market positions or would like to know more about how value and growth investing can work for you, contact Safe harbor Fiduciary for more information.
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