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Growth Stocks vs Value Stocks: What’s Your Approach to Investment Management?

What are growth stocks?

Growth stocks tend to be offered by established companies offering earnings higher than the average market rate – i.e. they have a high price-to-earnings (P/E) ratio and high price-to-book ratios. To qualify as a growth stock, analysts assert that it should achieve a 15% or higher return on equity. Because growth stocks are usually recognised as offering high value, they may come at a premium.

Furthermore, investors in growth stocks are less likely to receive money from dividends than they are from future capital appreciation. For some, this can be a drawback, and for others a plus. Certain investors may see growth stocks as representing poor value in the market, particularly in relation to value stocks; others will overlook this in favour of the potential that growth stocks have to outperform the overall market over the longer term. Discuss the best growth stocks with your financial advisor to determine whether they are suitable investments for your goals.

What are value stocks?

The difference between value and growth stocks, is that the former are marked by market analysts as having a trading value below their book value. There are many reasons why a stock might be undervalued. For example, it might have attracted negative headlines because of a recent news scandal or because of some other form of market volatility. Investors in value stocks buy them in the hope that they will rise in value as the market adjusts to reflect their true worth. However, just as overweighting investment in growth stocks may prove risky, so too may investing heavily in value stocks. There’s no guarantee that even the best value stocks will return to true market value quickly, especially if the stock is associated with negativity.

Choosing between growth stocks and value stocks

Quite simply, whether an investor chooses to place greater emphasis on growth or value stocks depends on their individual time horizon, goals, risk tolerance and financial advice.

It is also important to realise that over shorter investment cycles, the performance of either growth or value stocks depends largely on the particular conditions of the market. For example, value stocks usually fair better during bear markets (when share prices are falling), while growth stocks may perform better during bull markets (when share prices are rising). In all likelihood, the way to increase the chances of growth over the long-term is to invest in a diversified portfolio that includes a broad mix of both growth stocks and value stocks.

So called “blended funds” offer a combination of the two stock types and some portfolio managers will adopt a GARP strategy (growth at a reasonable price) which actively identifies best growth stocks, but also considers the indicators of value.

How nvestment management works for expats

Blacktower’s expat financial advisers can help with a range of investment management and wealth management services. We believe in a diversified approach to investment, and offer bespoke discretionary fund management services supplied by industry experts Quilter Cheviot.

Contact us today for help and more information around how investment management works and identifying growth and value stocks.

Disclaimer: The provision of information in this communication is not based on your individual circumstances and does not constitute investment advice. Blacktower makes no recommendation as to the suitability of any of the products or transactions mentioned.

Disclaimer: This communication is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice form a professional adviser before embarking on any financial planning activity.” 

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