Growth vs. Value Investing: What Are the Differences?

Key Points

• Growth stocks are expensive by valuation but offer some type of market-beating product or innovation.
• Value stocks are cheap by traditional fundamental metrics and may be trading for less than they're worth.
• Both styles seek to beat market averages, but require the right environment for outperformance.

The question of growth vs. value investing is arguably the biggest rivalry in modern markets. We're talking Yankees vs. Red Sox, Foreman vs. Ali, or Elon Musk vs. the SEC. Growth and value each have legions of proponents who will fiercely argue the benefits of each investing style over the other. And then some investors are more down the middle, arguing for value or growth depending on the market environment. 

As with most debates, the truth likely lies somewhere in the middle. Growth can still outperform value for extended periods or vice versa. One of the key differences between value and growth investing is that value investors won't overpay for innovative companies or exciting new technology.

Keep reading to learn about the differences between growth and value investing, and which is right for you.

What Is Growth Investing?

Growth investing focuses on companies expected to expand at an above-average rate compared to the overall market. This strategy offers the potential for high capital appreciation and tends to outperform in bull markets, particularly for companies with strong brand presence and market dominance. However, growth investing comes with risks, including higher volatility, overvaluation concerns that can lead to market corrections, and a lack of dividend income as profits are reinvested for further expansion.

Examples of Growth Companies

Growth stocks are often found in industries like technology, healthcare, and innovation-driven sectors, characterized by high revenue and earnings growth potential, higher price-to-earnings (P/E) and price-to-sales (P/S) ratios, and minimal or no dividend payouts. These companies typically reinvest their profits into expansion rather than paying dividends. 

Some notable examples of growth companies include:

• Alphabet Inc. NASDAQ: GOOG: A leader in internet services and products, Google has consistently demonstrated substantial growth through innovations in search, advertising, and cloud computing.

• Amazon.com Inc. NASDAQ: AMZN: Starting as an online bookstore, Amazon has evolved into a global e-commerce giant, expanding into cloud computing, artificial intelligence, and digital streaming.

• NVIDIA Corp. NASDAQ: NVDA: Known for its advanced graphics processing units (GPUs), NVIDIA has experienced rapid growth by capitalizing on trends in gaming, data centers, and AI technologies.

What Is Value Investing?

Value investing focuses on identifying stocks trading below their intrinsic value, often due to market overreactions, economic downturns, or temporary setbacks. This approach offers several advantages, including lower volatility, reduced risk of overvaluation, and consistent dividend payments. However, value investing requires patience, as it may take time for a stock’s true worth to be recognized. Additionally, these stocks can underperform in bull markets, and some companies remain undervalued due to underlying weaknesses.

Examples of Value Companies

Value stocks are typically found in sectors like financials, energy, and consumer staples.  Value investors seek companies with strong fundamentals, such as lower price-to-earnings (P/E) and price-to-book (P/B) ratios, steady revenue, and higher dividend yields. 

Some notable examples of value companies include:

• Johnson & Johnson NYSE: JNJ: A multinational corporation specializing in pharmaceuticals, medical devices, and consumer health products, known for its consistent performance and reliable dividend payouts.

• JPMorgan Chase & Co. NYSE: JPM: One of the largest financial institutions globally, offering a range of financial services and demonstrating resilience across various market cycles.

• Exxon Mobil Corporation NYSE: XOM: A leading oil and gas company with a long-standing history of dividend payments, representing a classic value investment in the energy sector.

Growth vs. Value Investing: Key Differences

When comparing growth and value investing, it's essential to understand their distinct characteristics and how they perform in different market conditions. The table below highlights the key differences between these two investment strategies.

Feature	Growth Investing	Value Investing
Focus	Future growth potential	Undervalued companies
Risk Level	Higher	Lower
Stock Valuation	High P/E ratios, premium pricing	Low P/E ratios, discounted pricing
Dividends	Rarely paid	Often paid
Market Performance	Best in bull markets	Best in downturns or recoveries

Historical Performance Comparison

Over the past two decades, growth stocks have significantly outperformed value stocks. As of December 31, 2024, the Vanguard Growth ETF NYSE: VUG has achieved a total return of approximately 959.47% since its inception on January 26, 2004, equating to an average annual return of about 12.52%. In contrast, the Vanguard Value ETF NYSE: VTV has delivered a total return of around 461.70% over the same period, corresponding to an average annual return of approximately 9.01%.

Why such drastic outperformance from growth stocks? Over time, growth tends to beat value since the biggest winners in the growth arena often become the Amazons, Microsofts, and NVIDIAs of the world. But you also must consider the environment since the Great Recession and its low rates, low inflation, and a healthy influx of capital looking for outperformance.

In the decade following the Great Recession, growth stocks—especially those in the tech sector—saw rapid price appreciation. Value investors got a reprieve in 2022 when rates rose. With both material, labor and capital costs rising, value stocks held strong while growth stocks plummeted. But the rally was short-lived and growth once again outperformed value in 2023. Investors need to understand the cyclical nature of markets if they want to maximize growth and value factors.

Which Strategy Works Best?

The choice between growth and value investing depends on your financial goals, risk tolerance, and market conditions. Each strategy has its advantages, making them suitable for different types of investors and economic environments.

When to Choose Growth Investing

Growth investing is ideal for those who are willing to take on higher risk in pursuit of substantial long-term gains. This strategy works best if:

• You have a long-term investment horizon and can endure market fluctuations.
• You can tolerate higher volatility in exchange for the potential of significant capital appreciation.
• You believe in the future potential of disruptive industries such as technology, biotechnology, and artificial intelligence.
• The market is in a strong growth phase, with bullish trends supporting high-growth companies.

When to Choose Value Investing

Value investing appeals to those who prioritize stability, consistent returns, and lower risk. It may be the right approach if:

• You prefer lower risk and steady dividend income rather than high volatility.
• You are comfortable holding stocks for extended periods while waiting for their true value to be recognized.
• The market is recovering from a downturn, creating opportunities to buy strong companies at discounted prices.
• You seek fundamentally sound businesses trading below their intrinsic value, offering a margin of safety.

Can You Combine Growth and Value Investing?

Many successful investors use a blended approach to balance risk and reward. A mix of growth and value stocks can help diversify your portfolio, ensuring steady returns across different market conditions.

For example, an investor seeking a diverse portfolio might give 65% weight to growth and 35% to value during bull markets or declining rate environments. If inflation grows and rates go up to combat it (like in 2022), an allocation revision to 35% growth and 65% value might be more beneficial. Use your investing goals and risk tolerance to compare stocks and build your ideal portfolio.

Popular hybrid investment strategies include:

• GARP (Growth at a Reasonable Price): This strategy blends growth and value by investing in companies with strong earnings growth potential while ensuring they are not overvalued. Investors using GARP focus on metrics like the price-to-earnings growth (PEG) ratio to identify stocks that offer both upside potential and a reasonable valuation.
• Dividend Growth Investing: This approach seeks companies that combine steady earnings growth with a history of increasing dividend payouts. By investing in businesses with strong fundamentals and shareholder-friendly policies, investors can benefit from both capital appreciation and reliable income streams.

Growth or Value—Which Is Right for You?

Both growth and value investing have their advantages. Growth stocks offer high returns but come with greater risk, while value stocks provide stability and income through dividends. Your choice should align with your financial goals, risk tolerance, and market outlook.

For long-term investors, a balanced approach using both strategies can offer the best of both worlds. No matter which you choose, conducting thorough research and staying disciplined is key to success in the stock market.

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