It is by far the hottest debate in recent weeks, certainly after the US election and while we gradually approach a very first reopening of the economies depending on the course of vaccinations in each country.
Let's analyze Growth in relation to Value stocks and see how this can affect an investment portfolio in relation to volatility. And how this was captured in 2020 but also what changes in 2021 in my podcast.
Development companies prioritize the transition from small, emerging companies to leaders in their sectors as soon as possible, using the latest automation technology. Early on, these types of companies tend to focus on increasing their revenue, often 'sacrificing' rapid profitability by targeting the great image. After a period of time, growth companies start to focus more on profit maximization, especially when the necessary scaling has been achieved.
As key financials improve, the value of the company increases in the eyes of investors who are aware of this growth and can understand what is coming. This can create an extremely positive feeling that will entice even those who had not already realized it. Rising stock prices can boost a company's reputation, helping it gain even more business opportunities.
Growth companies tend to have relatively high valuations after a few years, having proven that their model works better than that of competitors, as valued by price-to-earnings and price-to-book value indices. However, they also have faster revenue growth than their close competitors, without having to increase their costs to the same extent.
Typical examples are all the success stories of Nasdaq companies, but of course other startups that have not managed to enter a stock market yet.
Value stocks are publicly traded companies and have low valuations in relation to their profits and their long-term growth potential.
Value stocks do not have impressive growth characteristics. Companies that are regarded as Value have stable, predictable business models that generate moderate but steady profits over time.
There are many examples either in America or in Europe that has a lot of Value stocks such as big banks, airlines or car companies.
Which is better: Value or Growth
Both Growth and Value stocks offer investment opportunities which, however, must always be analyzed in light of the possible fluctuations they may have and ultimately the appropriate investment horizon.
In the chart below, analyzing the changes that the so long anticipated upcoming reopening will bring to the current status of economies, you can see how we completed a rebalancing in our Growth plan, from Growth stocks that had rallied over 45.5% in the last 12 months, to Value stocks which, although they had performed well so far, are still preparing for an even better comeback.
Chart 1: The last 12 months reveal a rally of 45.5% of Growth Stocks, while Value Stocks have rallied as much as 26.45%.
Chart 2: Since the beginning of the year but especially since mid-February, a rise of 8.4% of the Value stocks show the clear supportive attitude of the markets to “big players”, while the Growth shares are a slight 0.88% down for 2021.
However, the best investment style for you depends to a large extent on your personal financial goals, your investment preferences and the investment horizon you set. And there comes the independent wealth manager, who being supported by the right tools, can give you access to diversified investment portfolios that make your money work in any market conditions. The wealth manager is in charge to keep in touch with the latest market developments and do all the necessary fine-tunings that are needed. Especially for people who do not have the time or the necessary experience to do all the above on their own.
Below you can see our Growth plan which continues to have a better performance comparing to major benchmarks like World MSCI or SPX500 during the last 5 years.
Growth Plan XSpot Wealth
Listen to our podcast on Youtube here.
Please remember that past performance is not a reliable indicator of future performance
This document does not constitute and shall not be construed as a prospectus, advertisement, public offering, or placement of, nor a recommendation to buy, sell, hold or solicit, any investment, security, other financial instrument or other product or service. This document is for general information only and is not intended as investment advice or any other specific recommendation as to any particular course of action or inaction.