The Case for Value. As always, money managers have different allocation strategies. Some are strong proponents of value investing. Scott Phillips, hedge fund manager and author of Buying at the Point of Maximum Pessimism, makes the case for value investing in his new book. "Value investing has outperformed growth investing by about 2.5 percentage points going back over the past 80 years," he says. "What you have is a little bit lower volatility. The goal of value investing is to buy an asset for less than it's worth."
Value investors look to protect against the downside. By buying well-known companies with lower prospects for growth, these investors aim to protect themselves from the volatility that comes with investing in small, lesser-known growth companies. Coming out of the bear market after the financial crisis, growth stocks soared. Now, in the second year of a bull market, Phillips believes it's important for fund investors to look to higher-quality names.
"Studies have shown that as a bull market matures—simply measuring what happens in the first year versus the second year—you start to see a tremendous shift to dividend-paying stocks," he says. Generally, Phillips says the best performing companies will become blue-chip names that make up the Dow over, say, the growth stocks that make up a large part of the tech-heavy NASDAQ.
What About Growth? Other experts disagree. Adam Bold, founder of the Mutual Fund Store, says that for the past year and a half, he had equally weighted value and growth in his clients' portfolios. Now, he says he's rebalanced with an significant overweighting in growth, although he still owns some value stocks as part of a well-diversified strategy.
"The reason being that we're coming out of a recession and what's happened is that some companies responded to the recession better than others," he says. "Even though we do believe the economy is getting better, no one has any pricing power right now, so those companies who can actually show earnings growth in what is still a pretty tough environment are going to be rewarded."
Experts agree on one thing: If you go all-in one way or the other, you will probably wind up getting burned. "There's not one discipline that works well in every single market cycle, and you have to really come to grips with that fact so you don't end up buying what worked the year before," Short says.