Growth or value stocks? Why the answer today may be ‘both’
As technology redefines entire industries, potential opportunities for growth exist more broadly, says our Chief Investment Office
STOCK INVESTORS POSITIONING THEIR PORTFOLIOS for economic recovery have given fresh urgency to an age-old debate: growth or value?
Growth investors seek stocks or mutual funds of companies offering the potential for strong earnings growth. Though there are no guarantees, growth investors can be willing to pay a higher-than-average price for these stocks in hopes that the prices will rise still higher, despite their greater tendency to be affected by market swings.
“As people and investors, we like to put things in boxes. But today’s marketplace represents a confluence of growth and value.”
— Chief Investment Officer for Merrill and Bank of America Private Bank
Value investors, on the other hand, look for companies whose prices may have fallen, but that still have strong fundamentals. They’re looking to capitalize when and if those companies regain their lost value. These stocks, generally of well established companies with proven histories of financial performance, also often can offer dividends.
But in today’s market, the distinctions between growth and value are blurring, says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. Choosing one at the expense of the other could be a mistake. “As people and investors, we like to put things in boxes. But today’s marketplace represents a confluence of growth and value.”
As technology redefines entire industries and sectors once considered value-oriented adjust to new realities, potential opportunities for growth exist more broadly, Hyzy says. As an example, he points to the industrial sector, once viewed as too stodgy for growth investors. “Industrials are now seen as a growth area, thanks to innovation and disruptive technologies.” Similarly, the consumer sector, which used to be known primarily for cyclical growth, currently has more resilience. And the major tech companies, no longer the new kids on the block, now could be more likely to offer dividends.
“When lines get blurry, you need to have a diversified mixture,” Hyzy says. What’s more, both growth and value have their place in an economy seeking to recover from the ongoing effects of the coronavirus. Growth stocks tend to do well when interest rates are low and corporate earnings are rising. Value stocks tend to perform well early in an economic recovery, though the benefits may diminish in a prolonged bull market. The most important thing, Hyzy says, is to consider all of your goals and timelines and build your strategies around them.
Opinions are as of the date of this article 09/28/2021 and are subject to change.
Investing involves risk including possible loss of principal. Past performance is no guarantee of future results.
The Chief Investment Office (CIO) provides thought leadership on wealth management, investment strategy and global markets; portfolio management solutions; due diligence; and solutions oversight and data analytics. CIO viewpoints are developed for Bank of America Private Bank, a division of Bank of America, N.A., (“Bank of America”) and Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S” or “Merrill”), a registered broker-dealer, registered investment adviser and a wholly owned subsidiary of Bank of America Corporation (“BofA Corp.”). This information should not be construed as investment advice and is subject to change. It is provided for informational purposes only and is not intended to be either a specific offer by Bank of America, Merrill or any affiliate to sell or provide, or a specific invitation for a consumer to apply for, any particular retail financial product or service that may be available.
Investments have varying degrees of risk. Some of the risks involved with equity securities include the possibility that the value of the stocks may fluctuate in response to events specific to the companies or markets, as well as economic, political or social events in the U.S. or abroad. Bonds are subject to interest rate, inflation and credit risks. Treasury bills are less volatile than longer-term fixed income securities and are guaranteed as to timely payment of principal and interest by the U.S. government. Investments in foreign securities (including ADRs) involve special risks, including foreign currency risk and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are magnified for investments made in emerging markets. Investments in a certain industry or sector may pose additional risk due to lack of diversification and sector concentration.
Companies may reduce or eliminate dividend payment to shareholders. Historically, dividends make up a large percentage of stocks’ total return.
Investing in growth stocks incurs the possibility of losses because their prices are sensitive to changes in current or expected earnings. Value stocks are securities of companies that may have experienced adverse business or industry developments or may be subject to special risks that have caused the stocks to be out of favor. If the manager’s assessment of a company’s prospects is wrong, the price of its stock may not approach the value the manager has placed on it.
Asset allocation, diversification and rebalancing do not protect against loss in declining markets.
Investments in a certain industry or sector may pose additional risk due to lack of diversification and sector concentration.
