The never-ending question of ‘is sexy better than dependable?’ spans all of life’s greatest challenges: underwear, cars, spouses, and, yes, even stock market investments.
Ask yourself, do I prefer new, up-and-coming companies that grow quickly, or mature stable companies with slow but steady growth? The verdict is still out on the undies.
When I invest, I prefer the cotton undies of stocks. That is, value stocks that provide slow growth but good income through dividends. My bestie, however, prefers to go after the sexy, lacey types, aiming to strike it rich with growth stocks that get all the media attention.
But is one better than the other? Are either of us ever going to be hosting a yacht party with Kim and Kanye? (These are questions that NEED answers.)
*Note: This information is for people that consciously invest in stocks, pay attention, and move them around. There is the other type of person that gives their money to a wealth management firm (think Vanguard or Fidelity) and doesn’t look at the money until they’re retired. Again, type of undies, your choice.
The way I see it, you’ve got two routes.
Growth Stocks – (n) a company stock that tends to increase in capital value rather than yield high income. Aka the sexy lingerie of stocks – eye-catching and exciting.
Value Stocks – (n) shares of a company with solid fundamentals that are priced below those of its peers, based on analysis of price/earnings ratio, yield, and other factors. Aka the cotton undies – functional, practical, and dependable.
Sexy Lingerie (aka Growth Stocks)
Analysts usually categorize stocks as growth stocks if they feel the company will experience a period of expansion over the next few years and will likely outperform the market. These are often new companies expected to make a big impact by creating a new market or an innovative product (Hi, Google). Do not expect to see Beanie Babies on this list.
The big draw of growth stocks is their potential for large growth. They are more rewarding, because they carry more risk. It’s a little like playing craps: you’re betting they go big, otherwise you go home (with empty pockets).
The prices are high compared to the sales or profits (think when Snapchat IPO’ed and wasn’t profitable). In human terms, that’s more expensive. People are willing to pay more for potentially large growth, which, news flash, is riskier. If expectations of high growth don’t materialize, the prices could plummet. (Read: Your lingerie just went up in flames.)
Lastly, these companies generally do not pay dividends during their growth periods because they’re reinvesting extra funds back into the company. Sexy, sure, but selfish.
Cotton Undies (Value Stocks)
Value stock prices are lower relative to earnings or dividends. These companies are usually mature with little or no growth and have a stable dividend payout. Think of it like your Great Aunt Virginia. You can always count on her for that $5 bill on your birthday.
Prices are relatively low compared to their projected earnings or profits. For you, that means less expensive and less risk. These are income generators, and as a result, many value stocks also pay dividends. It’s like a full-coverage, no-wedgie guarantee.
You’ll likely miss out on any champagne-popping celebrations going on in sexy stock land, as value stock companies generally do not provide quick profits. Rather, they grow slowly or sometimes not at all.
Which one is better?
So, how do you choose which type of stock to hold? Several studies show value stocks outperform growth stocks in the long run by about 1 percent. While value stocks do well overall, especially in a recovering economy, they lag when the market is hot.
Growth stocks shine in a hot market, but are the first to be punished in a cooling market.
Much like our choice in underwear, picking stocks is about personal style. So it’s really up to you. How much risk are you willing to take?
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