Since the financial crisis, growth stocks have dominated value stocks and produced the bulk of market gains. The seven largest companies in the S&P500 are all the big tech companies like Apple (NASDAQ:AAPL) and Microsoft (NASDAQ: MSFT), while the top 10 constituents of the S&P 500 contributed about half of the S&P 500’s total gain in 2021.
A growth-led stock market can be explosive, but a value-led stock market offers many investors a more attractive risk-return profile. Here are three reasons why value investing return could be good news for you.
1. Growth stocks have become expensive
Between 2019 and the end of 2021, Apple and Microsoft added $4 trillion in market capitalization to the S&P 500 after Apple gained 364% and Microsoft 242% over that three-year period. Both companies are incredibly well-run businesses, but not even Apple and Microsoft can grow revenue, earnings, or free cash flow (FCF) fast enough to keep pace with this level of price appreciation.
As a result, valuations for both companies have exploded well above their five-year medians.
With the largest constituents of the S&P 500 looking expensive, it makes sense that the market would look to sectors other than technology to contribute a larger portion of the index’s gains in 2022.
2. You can better understand what you own
Investors like Ark Invest CEO Cathie Wood are focused on finding paradigm-shifting growth stocks that have the potential to disrupt industries and deliver above-market returns over time. While these companies have a lot of upside, they can also be tricky to understand, difficult to value, and incredibly volatile stocks to own. Taking a small position here and there in an exciting growth stock makes sense to many people. But allocating the lion’s share of your savings to high-risk, high-return growth stocks is a game that probably few people should be playing.
For most investors, investing in a business that you understand and believe can grow over time may be a better long-term strategy. It may produce fewer yields than a more aggressive style, but it will likely be less volatile and result in fewer sleepless nights.
Companies like Procter & Gamble, Starbucks, and McDonald’s are easy-to-understand, industry-leading companies that pay dividends. Similarly, industrial stocks such as caterpillar, Honeywell, and Waste Management providing products and services that surround our daily lives – building services, thermostats and waste collection, transport and disposal.
Owning a business you understand can help you fight the mental side of investing by sticking with a business during a sale and adding to the position if the market gives you a cheaper price.
3. It’s a better market for retirees and passive investors
Growth stocks tend to be volatile and don’t pay dividends, while many value stocks pay attractive dividends that can supplement retirement income. A market dominated by value stocks is best for retirees or those interested in generating passive income. Value stocks tend to have a risk/return profile better suited to retirees. Sometimes boring investments are the best investments. Laundry detergent, soap, and McMuffins might not be as exciting as the Metaverse. But the companies that make these products tend to generate steady organic growth even during recessions. It’s the kind of business model that investors who can’t afford to lose their investment capital depend on.
It is too early to tell if we are in a period of transition from growth to value. What we do know is that energy, industrials, financials, healthcare and consumer staples stocks are currently dominating the market because they are geared to perform in an inflationary environment. and higher interest rates.
Changing of the guard
Investors with a higher tolerance for risk now have the opportunity to buy many blue chip growth stocks on sale, which is especially great news for young investors or those just starting out.
If the market sell-off persists, it might be wise to adopt the glass-half-full perspective as a chance to buy or as a way for sectors other than technology and consumer discretionary income to help beat the market. earnings.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.