Faced with the recent boom of technology companies and growth stocks, does it make sense to allocate profits to value stocks?
With rising global stock index prices and the boom in artificial intelligence (AI), the growth stocks sector has outperformed the value stocks in recent years. Faced with this context of extreme euphoria, does it make sense to shift part of your profits towards value stocks? It depends. Here are some considerations.
Is it better to accumulate growth or value stocks?
Answering this question becomes more and more complex every year. For less experienced traders and investors who entered the markets in the last decade, the answer often seems obvious: it is better to expose yourself more to growth stocks. The latter have in fact clearly outperformed the value sector over the last ten years. Comparing the iShares Russell 1000 Value ETF (IWD) with the iShares Russell 1000 Growth ETF (IWF) and plotting a performance graph, you can easily see how the growth sector beat the value, even though both funds have grown in value.
However, the same cannot be said of the period between the bursting of the dot-com bubble and the 2008 financial crisis, during which value stocks significantly outperformed. In summary, before 2000, the boom in digital companies had triggered significant appreciation in growth stocks. Then, with the burst of the dot-com bubble, value stocks once again became a convenient choice in terms of asset allocation.
Now, the IWD/IWF performance graph has returned to levels prior to the dot-com tech crash and the COVID-19 crisis. Therefore, many may find it appropriate to consider allocating a portion of profits to value company stocks, even if growth stocks offer historically high yields and dividends.
Which actions to monitor and why?
This doesn’t mean that value companies didn’t perform well during the growth boom. Likewise, the decline of growth companies does not necessarily mean that value companies have not suffered capital losses.
In fact, taking as an example some of the most requested value companies on the market, such as Berkshire Hathaway, Procter & Gamble, and Walmart, we can see that these companies maintain a more linear growth trend compared to other big caps of the growth market. Over the past 10 years, Berkshire Hathaway’s stock value has increased by approximately 214%.
- BRK, 1W
- Source: Baha.com
On the other hand, big names in the growth sector, such as Apple, have seen an increase of around 710% since 2014.
- AAPL, 1W
- Source: Baha.com
The main difference lies in the linearity of the growth of share prices: value companies have a much less volatile and, therefore, less fluctuating trend. In times of sharp stock market downturns, these companies tend to retain value better than growth companies.
Original article published on Money.it Italy 2024-05-06 16:01:00. Original title: Azioni Value vs Growth: quali conviene comprare oggi?
