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Comparing Growth vs. Value

Most retirement plans offer an array of stock and bond funds, each with its own investment strategy and objective. One way stock funds are categorized is by style — growth and value. When selecting a portfolio of funds, it's helpful to have an understanding of the differences between growth and value stock funds, as well as the potential risks and opportunities presented by both.

Growth and Value: Complementary Investment Styles

Growth fund managers choose stocks of companies with higher earnings, revenue, or sales growth for their fund. These companies have greater potential to continue growing at a fast pace. Investors may pay more to invest in these companies because of that potential.

The idea behind value investing is that sometimes stocks of good companies are selling at a discount and their price is expected to bounce back in time when the true value is recognized by other investors. However, it's important to note that this recognition of value may take time to emerge and, in some cases, may never materialize.

The following chart shows some of the general differences between the two styles of stock funds.

Growth Stock Funds
Value Stock Funds

Growth-style funds buy stocks of companies that have greater potential to grow faster than the average. These are often companies in more rapidly growing sectors of the economy, such as information technology.

Value-style funds buy stocks of companies that are less expensive and may be growing more slowly than the market, or buys stock in companies paying a larger dividend, such as financial stocks.


Characteristics

  • Higher valuations than broader market
    (Price to earnings, price to book value, price to cash flow ratios)
  • Companies tend to reinvest in their future growth opportunities and may not pay a dividend 
  • Expectations of higher future growth in earnings, revenue, or sales
  • Tend to invest in consumer discretionary and technology stocks
  • Lower valuations than broader market
    (Price to earnings, price to book value, price to cash flow ratios)
  • Currently priced below similar companies in industry or below the company’s historical or residual valuation
  • May be poised for a turnaround or may pay a higher dividend
  • Tend to invest in financial, energy, and utility companies

Risks

  • Future growth may not occur as expected
  • Difficult to determine when price to book value or price to earnings ratios become too expensive
  • Misinterpreting a stock's price as a good value when the stock price may be inexpensive for a good reason
  • Difficult to stick to value policy when prices are beaten down

Growth and value funds represent two different approaches to stock investing. Both of these types of stock funds may have a place in an investor’s diversified portfolio. Some investors choose only one approach, while others combine growth and value investments to potentially smooth out swings in their portfolio's returns when one style is performing better than the other. Before investing in any mutual fund, you should read about these risks, which are explained in detail in each mutual fund’s prospectus.