While the S&P 500 lost 25% of its value from its highest point to its lowest in 2022, most investors didn’t lose nearly that much, maintains an article in Fidelity International, especially if they had a fairly diversified portfolio that wasn’t heavily focused on US stocks. UK shares would have withstood volatility relatively well, as have bonds. 2022 was a study in contrasts, the best example of which is the wide spread that occurred between growth and value stocks.
Heavily weighted by FAANGs and other technology companies, the Russell 1000 Growth index has dropped 25% this year, while the Russell 1000 Value index has only fallen about 5%. This scenario is unique; since the 2008 financial crisis, it’s been the opposite. Indeed, the last 35 years could be separated into only 3 long-term trends: the dot-com boom and bust from the late 80s to the early 2000s, when growth reigned supreme. Growth had the same trajectory from 2008 to 2021. Meanwhile, from 2000 to 2008, it was value that wore the crown. And with the most inexpensive shares still priced far below those that are highly priced, many believe that we’re at the outset of another long era belonging to value, the article contends.
Growth was able to outperform for so long in no small part because of incredibly low interest rates, but now, as interest rates rise higher and higher in an effort to combat inflation, growth stocks look less appealing. Interest rates are generally used to determine a present-day value for a company’s earnings and cash flows in the future. Lower rates make current values of future earnings higher, while higher interest rates make that future growth worth less. Additionally, an uncertain market makes growth less attractive as investors are more unwilling to take risks. And while value can go through long stretches of underperformance, its periods of outperformance, though shorter, can bring outsized returns and rewards to investors, the article maintains.
Growth can be incredibly tempting and will often lure investors in with promises of rich rewards in the short-term. But value investing takes a more grounded approach, forcing investors to be realistic about limitations and biases. But if it’s so much less risky and still offers investing success, why isn’t everyone a value investor? The article posits three answers to that question. The first is loss aversion; value investors must endure long stretches where their portfolio underperforms, and some people aren’t able to stomach that. The second reason is that the human brain is hard-wired to think short-term instead of long-term, and value investing requires a long-term view. Lastly, going against the tide can be exhausting and difficult. Value investing runs counter to many of our instincts, and it isn’t a way to get rich quick. For those that have those tendencies, finding a value manager who can handle their money for them is likely the wisest route to go.
