Growth vs. value — Different investing styles can help your portfolio look sharp

You should add some style to your investing. No, we don’t mean getting dressed up while you select investments in your 401(k) account. We’re talking about investment style. Understanding how the two basic investment styles — growth and value — can help diversify your investments and increase the opportunities to grow your money.

Look for the bargains

Value investing is all about looking for a bargain, but not necessarily the lowest price. A value investor searches for stocks priced below what they're worth. Sometimes the market under-values a company and its stock price is low compared to its competitors or its historical price. It’s like finding a brand-name designer jacket on the sale table.

Often, stocks that fit this description are more mature companies whose growth has slowed. They might be suffering through temporary price decline due to economic conditions or if they are in an industry that has fallen out of favor with investors.

In addition to relatively low share prices, value stocks can pay above average dividends. Dividends are payments made to the shareholder as a way of returning some of a company’s profits. Dividends may come in the form of cash or additional shares. They can help to add income to your portfolio. When dividends are paid in a retirement account, taxes are postponed until withdrawn.

A value investor must decide if a “bargain-priced” company has what it takes to get back on track so the share price will start going up again. This can sometimes take a while, so value investors may need to be patient. Keep in mind, value investments may perform differently than other types of stocks and may continue to be undervalued for long periods of time.

Go for the growth

Growth stocks have sizzle. These companies often grow faster than the market as a whole. They have momentum and some sort of competitive advantage that gets investors excited about the potential increases in revenues and earnings causing these companies to command higher prices. The share price is sometimes based on what the company might be worth at some future date. If the company fails to meet expectations, the price can tumble pretty quickly, so be prepared to accept higher market risk. Growth companies typically pour profits back into the business to accelerate the growth, meaning they typically don't pay dividends.

A growth investor ideally wants to invest early, before the stock price has risen significantly. However, successfully timing the market and stock prices is difficult. Steady investing over time regardless of price is a better approach for your retirement savings because you can take advantage of dollar cost averaging.

Consider your options

Which approach is the most stylish? Both. Growth and value tend to take turns at the top of the performance chart. Understanding growth and value can help you diversify your portfolio.