Beginners Guide to Buying Share in the UK: Growth or Value?
One of the first decisions a beginner investor has to make is how to balance capital allocation between ‘growth’ and ‘value’ companies. The decision even has to be made if the investor has taken the decision to opt for funds rather than trying to pick winners themselves, which is often the best decision for those who lack experience or time. Funds might be passive index
So what is the difference between equities defined as ‘growth’ and those considered ‘value’ and what are their relative strengths and risks?
Growth shares belong to companies that have a recent history, and the future prospect of, strong growth in metrics considered important to long term returns. This will generally be growth in revenues, users, market share or, ideally, a combination of all three. The share price of growth companies is much more expensive than
Tech stocks usually fall into the ‘growth’
Value shares are the opposite end of the spectrum and trade at a multiple of
Which is the Better Investment - Growth or Value?
While both categories of shares have their disciples and investors that swear by a strategy of focusing investment on one or the other, the truth is that both categories have historically seen periods of dominance in terms of which delivers the better returns. Since 2010 growth stocks have outperformed value stocks by over 20%. However, over the 22 years between 1987 and 2009, focusing on value stocks would have been the better approach. During that period growth stocks outperformed value options only between 1998 and 2000 as the dotcom bubble melted up.
As a rule of thumb, growth stocks do better during a strong bull market and value stocks under more ‘normal’ conditions or a downward trending market. Growth stocks are a bet on future returns which can never be guaranteed. As Sam Vecht, manager of the Black Rock Frontier Markets investment trust
“There is evidence to show that ignoring the cost of what you pay for an investment in the hope of receiving a higher price eventually is not a good strategy. It’s all about the price.”
A look at some figures that up. Shares in
However, that logic no longer holds when we get into
There is no right or wrong answer to the balance of capital that should be allocated to value and growth shares. However, if a bull market run appears to still have plenty of time to run a greater allocation can be made
Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.
There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.