Growth & Value Stocks
Growth and value stocks do have their differences
When American Century funds asked a few hundred investors what the differences were between growth and value stocks they found out most didn't have a clue.
One of the things those in the financial services industry forget--be they brokers, portfolio managers, fund employees and even financial writers---is that most of the population outside of the business world knows little about the basics of investing. One of the things I've learned in the twenty-three years that I've been in the financial arena is while a lot of people know they should learn more about investing they shy away from it because it's seems like such a heady, dull subject.
A college friend from Denver said the other day, "It's just all so boring." And she's got a point. Not only is there an entire vocabulary of new terms to learn ---like net asset value, beta, load and no-loads and lots of literature to read to become investor savvy--- reading about investing has been known to be a great sedative for those who can't fall to sleep at night and listening to the Wall Street pundits on tv or radio a good reason to change channels.
That being said, money is what funds each of our own personal world's. So with life expectancies now longer than ever---and money necessary to live no matter what age you are---knowing what the difference is between various types of stocks, or fixed-income securities, is a must today if you're to build some kind of long-term savings and investing plan to live off of later in life.
To make sure you're on the right long-term investment track, it really is important to know what the differences are between growth and value stocks and have a representation of each in your portfolio.
"One of the big take-away's from the survey results was that people understand the importance of diversification, but don't know the distinction between growth and value styles of investing, " says Laura Kouri, a spokesperson at Amercian Century. " Out of the 300 people who took the quiz, only one person answered all 10 questions correctly. And, only 16 percent were able to answer seven out of the 10 questions correctly. "
With results like that, it's clear that there's plenty of room for investors to learn more about growth and value stocks. So, to test your knowledge and help you better understand some of the basic differences between them, here are four questions from the American Century's 2002 Growth & Value I.Q.Quiz along with their answers:
1. Which of the following best describes a growth stock? A) A stock that offers a guaranteed rate of growth tied to the consumer price index: B) A stock in a company that specializes in agriculture, lumber, landscaping and other organic products that are grown: C) A stock in a company demonstrating better than average profit and earning gains: D) All of the above; E) Don't know.
2. Which of the following best describes a value stock? A) A stock in a fast growing coming that specializes in high-value, low-cost products such as a discount retailer; B) A stock in a company specializing in valuable goods, like precious metals and jewelry; C) Stock with low price-to-book ratio; D) All of the above; E) Don't know.
3. Which of the following is a true statement? A) Value stocks outperformed growth stocks between 1927 and 2001: B) Smaller company value stocks outperformed larger company value stocks between 1927 and 2001: C) Maintaining a portfolio with a combination of growth and value stock generally is considered a prudent investment approach: D) All of the above: E) Don't know.
4. During periods of strong economic expansion, which type of investment generally performs better? A) Growth funds; B) Value funds; C) Neither; D) Both : E) Don't know.
The correct answers are: 1. C. A stock in a company demonstrating better than average profit and earnings gains. 2. C. Stock with low price-to-book ratio. 3. D. All of the above. 4. A. Growth funds.
While there's more to learn about these two kinds of stocks---such as how in down markets the lines between growth and value stocks can be blurred---just realizing that stocks come in different types can be the first step in making you a wiser investor.
For more information about growth and value investing, visit American Century's web site. Here are two ways to get to that information: One, www.americancentury.com/workshop/articles/diversifying_your_portfolio.jsp. Or, take this route: Go to www.americancentury.com . Once on the home page click on "individual investor"; on that page look for the title "education & planning" and under it, hit "strategies." Once on the strategies page, under the title, "managing risk & return" click the fourth bullet "diversify your portfolio holdings with growth and value stocks."
Dian Vujovich is a nationally syndicated mutual fund columnist, author of a number of books including Straight Talk About Mutual Funds (McGraw-Hill), and publisher of this web site.
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