What’s the difference between growth investing and value investing?
-Larry Adams, RFC, CPFA
When you invest for growth, you are typically seeking capital appreciation over the long term. You will likely choose investments that you believe will exhibit a faster-than-average increase in share price over the coming years.
Growth stocks have the potential to outperform slower-growing investments, such as income stocks, because gains are generally reinvested in the company to achieve further growth rather than distributed to shareholders as a dividend. Growth stocks can be volatile. One way to minimize the impact of that volatility on your portfolio is to purchase shares of a growth mutual fund. You’ll enjoy instant diversification (though diversification alone cannot guarantee a profit or ensure against a loss). And an actively-managed mutual fund also offers professional management expertise.
A value investor seeks out bargains, and chooses investments that have low prices in relation to such factors as earnings, sales, net current assets, and the book value of the issuing companies. A value investor might reject a popular blue chip stock because the price per share is too high, even though the issuing company is stable and has a record of steady growth. Instead, the value investor seeks to buy stock of a solid company that is temporarily out of favor or bargain priced for some other reason. In doing so, the value investor predicts that the share price will eventually return to a higher level when the stock comes back into favor, and the market drives the stock price back up. A mutual fund manager may specialize in growth investing, value investing, or some combination.