The Balancing Act of Growth and Value

Question of the week:I've always invested in growth mutual funds because they seemed to do so well. But the last year or so, the value funds are performing much better than growth funds. I'm thinking of switching all my money to value. What do you think about that? --Wobbling Dear Wobbling, It seems that the upswing in value funds has caught the attention of other investors, too, and that quite a few of them have the same idea you do. According to the Financial Research Corporation, a consulting firm that tracks these things, value-style funds brought in far more in new investments in the first quarter of this year than did growth funds. When we asked the Armchair Millionaire community how they are reacting to the upswing in value and drop in growth, we got a range of responses: Ignore the swings. "Have a diverse portfolio and stick with it. Ride out the highs and lows of the market and over time you will make money." --Joe G. Move a little with the swings. "I have shifted somewhat more into value funds. I do think it's worthwhile to adjust your portfolio mix depending on the market." --Mike F. Leverage swings to the fullest. "I've looked at the market swings as opportunity to invest in stocks that are undervalued with an expectation for growth. --Linda I'd caution you against falling into the classic trap of making drastic changes in your portfolio in order to chase performance. After all, who's to say that as soon as you switch to the value funds that we won't see an upswing again in growth? My quick guide will help you understand what growth and value investing is all about and how to wisely balance the two. The Armchair Millionaire Guide to Understanding Growth and Value What is value investing? Value investors are the bargain shoppers of the stock market, on the lookout for stocks that, for one reason or another, look inexpensive. It could be that the company is in an industry that has fallen on hard times or it may have recently had disappointing earnings reports. The trick to value investing is in determining which companies are fundamentally strong but has gone unrecognized by the stock market. Once they are discovered (or often re-discovered), the value investor is set to profit. What is growth investing? In contrast to thrifty value investors, growth managers are happy to pay full price (or even a premium) for stocks that have shown good growth in earnings in the recent past and that they believe will continue to show strong growth in the future. Typically, these companies offer much-in-demand products or services, a solid business plan and management team, and an overall healthy financial picture. What works when? Because the two styles are so different, it's unusual that they both work well at the same time. When the economy is growing, growth usually reaps the highest rewards. But during times of economic slowdown, investing in stocks that are still a real value can pay off nicely. What are the risks? Both styles carry their own kind of risk. Simply because they have further to fall, the prices of growth stocks can take a bigger hit during bear markets than value stocks. On the other hand, the risk in value stocks is that they simply may never achieve their hoped-for value. Which is right for you? If you're looking to build a well-rounded, long-term portfolio, the answer is "Both." By investing in at least one fund managed for growth, and one managed for value (or a single index fund, which will cover both), you'll be positioned to capture the advantages of each, regardless of what the economy may bring. At the same time, the diversification you'll achieve will help reduce the risks of each. THE BOTTOM LINE: There's always some part of the market in vogue, and another part in the doghouse. But since you can't accurately predict the next darling of Wall Street, stick with a diverse portfolio that covers all of the market.