Performance
This section includes an explanation of the performance of both value and growth stocks, as well as index funds, and the differences in their performance under various market conditions and economic environments.
The performance section explains how value stocks often perform better in the long run than growth stocks in unstable market conditions, while growth stocks tend to perform better when the market is on an upward trend and supported by consumer confidence. Followers of both objectives – value and growth – aim to achieve the best overall returns.
Unlike value and growth investors, index investors cannot claim full victory based on past performance history. Index investors may argue that they are not often the highest performers, but they are less frequently the worst performers over a time period. They can thus be assured of receiving average returns at least for a lower level of market risk due to diversification and low costs.
Volatility
This section explains the level of volatility for both value and growth stocks, as well as index funds, and the differences in return delivery.
Value investors enjoy a certain degree of “reliable” appreciation because dividends are largely dependable, while growth investors endure more volatility (notable ups and downs) in prices. Value stocks may perform well when an economic recovery is underway, but they may fade if the market continues to do well.
Index funds are usually grouped in the “large blend” category of blended value and growth funds because they consist of a mix of value and growth stocks. Index investors prefer a passive approach. They do not believe that the research and analysis required for active investing (whether in value or growth independently) will yield better returns than those generated by a simple, low-cost index fund.
Returns
This section explains how a value fund manager sets benchmarks and selects stocks to measure against. Such stocks are sold at a relatively low price compared to one of the recognized benchmarks, and according to these benchmarks, the measured values may apply to the currently relevant stock price. Earnings data or other fundamental value metrics, such as debt-to-equity or price/earnings/growth (PEG) ratios, are commonly used in value metrics.
Index investors may also believe that combining value and growth characteristics could lead to a greater outcome – there could be a vote equivalent to half value and half growth resulting in greater diversification and reasonable returns for less effort.
Growth tends to lag behind value and index when there is a bear market. The market is declining. Prices are falling. Index funds often do not dominate one-year performance, but they tend to outperform value and growth funds over long periods like ten years or longer.
When index funds win, they often do so by a narrow margin in the case of large-cap value stocks while winning by a large margin in the ‘small and mid-cap’ index arenas. This is at least partially due to the fact that expense ratios are higher (thus reducing returns) for funds managed by growth and value strategies.
Conclusion
Growth funds consist of shares in companies that have made progress and are expected to continue achieving and exceeding profit targets. You may not be able to buy them at an attractive price, but you can expect strong returns with some volatility. When there is a bear market, do not be surprised to see growth performance decline.
Value funds consist of shares in companies expected to achieve significant gains in the future but are relatively low-cost compared to growth stocks. They perform well in uncertain economic conditions, but in recessionary periods, they may not perform well.
Given
Because index funds replicate the underlying index funds, their return depends on whether they consist of value stocks, growth stocks, or both. Index funds tend to perform better than both value and growth stocks in the long run.
Frequently Asked Questions (FAQs)
1. What is the difference between a bull market and a bear market?
A bull market is considered a period of strong economic growth when the value of stocks and other securities rises. A bear market occurs when the value of stocks falls by 20% or more from its recent highs. It often indicates a weak economy. Although investors lose money in a bear market, it can be a good time to buy reliable value stocks at lower prices.
2. What does market timing mean?
Market timing means trying to predict what the market will do next and buying or selling stocks to see instant results. For example, one might try to buy stocks before their prices go up and sell them before they fall. While market timing can often lead to short-term gains, it frequently results in losses in the long run.
Source: https://www.thebalancemoney.com/value-vs-growth-vs-index-investing-2466434
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