Stocks Aren't Only For Growth

The 2022-23 inflation spike and accompanying stock volatility spurred many investors toward high-yield fixed-income investments as risk protection for their portfolios. But with core inflation edging lower and stock volatility more in hand, you may want to look at another investment—value stocks—to diversify* your portfolio further in 2024.

Value Stock Basics

A value stock is a security trading at a lower price than what the company’s performance may otherwise indicate. Investors in value stocks attempt to capitalize on market inefficiencies since the underlying equity price may not match the company’s performance. Common characteristics of value stocks include high dividend yield, a low price-to-book (P/B) ratio, and a low price-to-earnings (P/E) ratio. This combination makes value stocks potentially less risky than growth stocks.

Value stocks are frequently linked to solid, well-established businesses that operate in dependable sectors. Although their development rates may be slower, they are seen as financially reliable and may be undervalued by the market. Growth stocks are often found in sectors with strong growth potential, such as emerging markets, healthcare, or technology. These businesses may have greater volatility because they are frequently in their early phases and reinvesting profits in growth.

Risk Factors

Generally, value stocks are more stable than growth stocks and have lower volatility (see accompanying graph). However, remember, for diversification purposes, value and growth stocks are equities and are usually considered riskier than other types of investments.

What reduces the volatility and risk of value stocks? While their potential for capital appreciation may be moderate, they often offer steady income through dividends. In addition, the issuing company is already established and may have overcome many risks start-up or infant companies face. Meanwhile, growth stocks carry higher risk due to their higher volatility and market expectations.

While they offer the potential for significant capital appreciation, they may also experience greater price fluctuations and have a higher chance of underperforming during market downturns.

Are Value Stocks a Good Investment for Me?

They may be if your portfolio is well-diversified in bonds and fixed-income investments yet would like to mitigate further some of the risk of your high-growth stock investments. You can best benefit from a value stock by buying shares and holding them instead of trading to attempt to profit from upswings in the stock market. A value stock may take longer to appreciate as the market comes to realize its value fully. These stocks aren’t for investors looking for quick capital appreciation. In addition, you can make money from value stocks as they generally issue dividends, allowing for cash proceeds during this holding period.

How to Choose Value Stocks

The best advice about choosing value stocks or any other investment to diversify your portfolio is to talk with your tax and financial professional. You may want to use the “Dogs of the Dow” investing strategy to get an idea of stocks to discuss with your advisor. The strategy entails looking at the ten highest dividend-yielding stocks on the Dow Jones at the beginning of each year for potential buys and adjusting your choices annually.

*Diversification cannot eliminate the risk of investment losses. Past performance won’t guarantee future results. Investing in stocks or mutual funds can result in a loss of principal.

Source: Wiltshire Growth and Value Total Market Indices, Economic Research Division of the Federal Reserve Bank of St. Louis and LTM Marketing. Note that you cannot invest directly in an index.