With ads and articles constantly touting the importance of beating or at least keeping up with the Dow Jones or the S&P 500, you’re bound to become stressed if your funds’ or stocks’ performance is falling short. Inexperience or ignoring basic investing principles can lead to disappointing performance, certainly, but even superstar investors with stellar track records underperform from time to time.
Over a long enough timeframe, stock markets swing between favoring value investing or growth investing. Consider these three well-diversified exchange-traded funds: the S&P 500 SPDRS (SPY) has returned an average 13.84% return per year for the past ten years (as of Sept 11)1. But the SPDR S&P 500 Growth (SPYG) that tracks the faster growing stocks within the S&P 500 index has been averaging 16.54% over the same time2, while the fund that focuses on the relatively undervalued stocks in the index, the SPDR S&P 500 Value (SPYV) has eeked out an average return of 10.71%3.
None of those figures are anything to sneer at, since most financial planners expect stocks to return around ten percent. But, in dollar terms (not including taxes or any transaction costs, $10,000 invested in the growth ETF above would be worth around $46,212 today, while if you invested in the value fund, you’d be up, but “only” to $27,661, a difference of over $18,000 on a $10,000 investment.
That’s hard to ignore, but you may have noticed how dramatically many growth stocks fell in the midst of market panic. The past decade has been great for growth investors, but there have also been plenty of stretches when value stocks have outperformed growth stocks. Investors’ attention can easily shift away from how many electric cars or smartphones will be sold to the more traditional high yielding stocks or the appealingly predictable cash cows that are selling for pennies on the dollar. Warren Buffett is primarily a value investor, and despite the decade being wildly growthy, he still isn’t crying poverty.
Some of growth’s flash comes from low interest rates and tax policies that encourage companies to buy back stock instead of paying out dividends. With such low interest rates, any stocks that appear grossly undervalued would be rapidly brought private by hedge funds, management or through a competitor acquiring them. So value opportunities have been scarce and the performance of value funds reflect that. Also, many of the tech companies in the S&P 500 Growth index are both in the right place in the right pandemic (a hoisted glass to Netflix and Amazon here) or continue to innovate at the same rate as before.
There will be a time when value investing will come back into vogue, but just when that time will be is anyone’s guess. As you can probably guess by now, determining just when to shift between growth and value is the Holy Grail of tactical investors. Better to not bother chasing Holy Grails and instead remaining patient and staying consistent with a carefully thought out strategy.
Evan R. Guido is the Founder of Aksala Wealth Advisors LLC, a 2018 Forbes Next-Gen Advisors List Member, and Financial Professional at Avantax Investment ServicesSM. Evan heads a team of retirement transition strategists for clients who consider themselves the “Millionaire Next Door.” He can be reached at 941-500-5122 or email@example.com. Read more of his insights at https://finance.heraldtribune.com/category/ask-guido/. Securities offered through Avantax Investment ServicesSM, Member FINRA, SIPC. Investment advisory services offered through Avantax Advisory ServicesSM, Insurance services offered through an Avantax affiliated insurance agency. 8225 Natures Way Suite 119, Lakewood Ranch, FL 34202. Indices are unmanaged. Investors cannot invest directly into an index. The views and opinions presented in this article are those of Evan R. Guido and not of Avantax Wealth ManagementSM or its subsidiaries. Past performance does not guarantee future results.