Self-Investors: Value or Growth?

Apr 12, 2021

As of the beginning of April, value stocks are outperforming in all areas of the stock market. We see strong returns in large, medium and small companies, as well as international companies. What is causing this performance and can it hold?

Out of Favor for a Long Time

Value-oriented stocks have been out of favor for a very long time. How long? Morningstar published an article earlier this year that showed value stock funds performance versus growth stock funds. This article looked at large, medium, and small company stock funds. The difference has been staggering:

  • Over the past ten years, growth has outperformed value by +5.26%, +4.40%, and +5.25% per year for large, medium, and small companies!

  • Over the past five years, growth has outperformed value by +8.74%, +9.06%, and +9.43% per year for large, medium, and small companies!

  • Over the past three years, growth has outperformed value by +14.75%, +15.45%, and +15.89% per year for large, medium, and small companies!

  • Last but not least: Over the past year, growth has outperformed value by +32.15%, +34.48%, and +33.06% for large, medium, and small companies!

As you may have noticed, the relative gains from growth stocks have been increasing by the year, resulting in outstanding results over the past twelve months.

Will This Continue?

In recent years, there have been several false starts regarding value potentially taking off. Value investing enthusiasts have been pounding the table about a concept called "reversion to the mean." The theory is that any investment category that strays too far from its long-term performance will revert to that long-term average at some point. Therefore, a group of stocks, like value stocks, that have underperformed growth for a decade may go thru a period of outperformance to revert to their long-term historical average.

Westwood Holdings, a global investment management firm, published a whitepaper earlier this year showing the outperformance of growth over value stocks has hit its widest point in the last 25 years and now exceeds the gap leading up to the tech crash of 2000.

It is undeniable that the difference between value vs. growth stocks is at extreme levels, historically speaking. However, you could have made a similar argument twelve months or three years ago and been very wrong.

It is also true that the investment world is much different today than it was 10+ years ago. Low-interest rates and the continued movement to all things digital has not helped value stocks. But, pull up a list of the largest value stocks according to the Russell 1000 value index and you will immediately recognize names such as JPMorgan, J&J, Disney, Verizon, Comcast, etc. It seems unlikely these companies are going away any time soon.

Conclusion

So what should you do? Professionally managed portfolios adhere to an asset allocation that reflect the needs of the individual client and rebalance these portfolios periodically to prevent an overweighting in one market sector. In many cases, self-investors tend to select an asset allocation for their investment accounts and tend not to change anything as long as the performance is good.

If you have not thoroughly looked at your investments in a while, take a moment to see how much you have invested in growth stocks/funds versus value. You may be surprised. If the difference is large, you may consider starting a rebalancing program back to a level that makes sense for you. You would be selling some strongly performing investments and buying others that have not done as well. Or to put it another way, selling high and buying low, which is one of the founding principles of investing.

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