Growth vs. Value Investing

Vintage PursesShopping for a good stock isn’t all that different than shopping for a handbag. Some women are willing to shell out big bucks for this season’s “it” bag. Others love a deal, like finding a Coach classic at a consignment shop.

For investors, this difference in philosophy breaks down into two camps: growth versus value.

Growth investors like hot companies that are doing well and poised to do better. The stock price is high, but this investor is betting it’s going even higher. (Think Apple [AAPL].) Downside: should the growth rate falter, the stock price could drop dramatically.

Value investors, on the other hand, like a bargain. They’re looking for strong companies that are temporarily out of favor. This way, the investor can scoop up the stock on the cheap, and enjoy gains as its price recovers. (Think financial stocks or even a tech stock like Microsoft [MSFT].) Downside: the stock may never recapture its glory days.

“Everyone interprets value and growth a little bit differently,” explains Russel Kinnel, director of fund research at Morningstar. In fact, the same stock could be considered a value or growth play, depending on when it’s bought.

Not sure where you stand? A blend mutual fund is made up of growth and value stocks. To see where your portfolio shakes out, check out Morningstar’s Instant X-Ray.

Stock shoppers: Do your shopping habits mirror your investing style?

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