Value investing vs growth investing in 2021

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Value investing vs growth investing
Value investing vs growth investing

While it can be hard to quantify the total value of the global stock market, this entity’s cumulative capitalisation of all shares exceeded a staggering $70 trillion on December 31st, 2019.

This is even more remarkable when you consider that the corresponding number in 1980 was just $2.5 trillion. This highlights the incredible growth of equity backed stocks in the modern age, but what it doesn’t explain is the way in which this marketplace has diversified during the same period.

In this post, we’ll compare value investing and growth investing in the modern age, while asking which option is better for you?

The Pros and Cons of Growth Investment

In the case of growth stocks, these tend to represent companies that are considered to have the potential to outperform the overall marketplace.

This potential refers to future growth, and they’re typically small or mid-cap options that are based in lucrative and high-growth marketplaces.

Interestingly, this offers an insight into the main advantages of growth stocks, which may well be either fledgling in their nature or undervalued and benefit from huge annual increases over time. This minimises the cost to enter the stock market while simultaneously boosting future returns, with the precise value proposition calculated using fundamental stock analysis.

However, growth stocks may only offer value for a relatively short period of time, and in this respect, they may not be ideal for investors with a longer-term outlook. This is because they only retain their status until analysts feel that they have achieved their potential, with this time-frame varying for small and mid-cap stocks.

What About Value Investing?

There’s some crossover between growth and value stocks, as the latter are typically classified as trading below their true market value in real-time.

In this respect, they’re genuinely undervalued in the marketplace, creating a scenario where they may be able to provide a superior return if they rebound over time.

We’ve seen numerous equities emerge as value stocks in the wake of the coronavirus pandemic, with the Boeing brand offering a relevant example.

Boeing’s shares plummeted at the outset of the pandemic in March, from $280.70 on March 8th to just $98.21 on March 23rd. Now, while it’s yet to reach its pre-pandemic levels, it has since rebounded to $219.55 as of December 18th, creating plenty of opportunity for investors to cash in before it returns to its typical valuation in the near-term.

This represents the main benefit of value stocks, which also happen to represent established firms that are typically robust and capable of rebounding quickly from short-term price depreciations.

However, much depends on the reason why a stock’s value has plummeted in the first place, while you’ll also need to appraise the impact on a company’s fundamentals before determining whether it can return to its former glory.

Which Option is Best for You?

Ultimately, making a choice between growth and value stocks is a deeply personal one, which should be based on your outlook as an investor and wider investment strategy.

In general terms, however, it can be argued that growth stocks are the superior option for investors with a long-term outlook, as small or mid-cap entities may take a prolonged period of time to reach their full potential.

Conversely, value stocks may provide incentive for those of you with a short-term outlook, while it also offers reassurance for risk-averse traders given the established nature of the companies that they represent.

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