Value stock investing performance – Whiteboard Wealth #10


As I discussed in Whiteboard Wealth 9, value stocks and growth stocks are different. Value stocks are depressed or “compressed” in the price they’re trading for relative to their growth stock counterparts which trade at a much higher price relative to the financial metrics like dividends, PE ratio, book value – etc.


What’s Better? Value Stock Investing or Growth Stock Investing?


There’s no easy answer because most people who would ask that question want to know the short term answer (i.e. what’s going to be the best performer this year) not what’s the best LONG term performer. Year by year this is very volatile. You certainly can’t bank on value stocks or growth stocks outperforming each other. Since it’s a long term risk/reward trade-off, it’s best to have both value and growth stocks, yet have a little more value stocks relative to growth stocks.

How Should You Own Value Stocks?


Simple – value stock mutual funds. Don’t try to buy stocks based on their value or growth ratios. These ratios change, and unless you’re very in tune with the stock market and the ratios used to judge value and growth statistics, it’s likely to get you in trouble. It’s best to use mutual funds and ETF’s that tend to lean towards value stocks over growth stocks.

As you may know from following me and Redrock Wealth Management, we’re big fans of Dimensional Fund Advisors. DFA is the king of value stock investing! They do the best job of identifying and managing mutual funds which have value emphasis (or “tilts” as they call it). Their value tilts make sure you get the right amount of exposure to value stocks, without sacrificing broad stock market diversification.

That being said there are other great mutual funds out there as well. We recommend a process created by fi360 to analyze and manage mutual funds in your portfolio. Whatever you do, don’t buy mutual funds based on PAST performance. Past performance is nothing more than history, and the fi360 process does a much better job of setting you up for consistent long term performance moving forward.