By Christine Song of Small Investing Insights
Each year NYC’s fashion week shines football stadium lighting on what’s in my closet (or rather, what’s not in it). and in the wake of this whirling drama that passes through the city each fall, what always remains is my unfashionable wardrobe despite my sincere though somewhat feeble attempts to update my style. yes, fashion is all about change but when it comes to investing, can you really become top model by constantly switching styles?
preppy, goth, hipster – there are countless colorful labels to describe fashion but when it comes to investing, there are really only three: growth, value or core. now for most of us, we’ve only come across these “investing styles” when deciding where to put our 401k dollars. do you go with the Small-Cap Growth Fund, the Large-Cap Value Fund or the Mid-Cap Core Fund?
despite the widespread use of the growth, value and core labels, surprisingly there’s a lot of gray in their definitions. but typically, growth means looking for companies that are growing faster than the market (could be revenues, earnings, ROE). value means looking for stocks with PEs or other kinds of multiples lower than the market. and as for core, well, let’s just say it’s stuck in the middle – not too hot, not too cold. and these three “investing styles” can be applied to the individual as well, such as “i’m a value investor.”
and like fashion, certain “investing styles” are in vogue or not depending on where you think the economy is heading. now growth tends to do better when we’re heading into a recovery and value tends to outperform when heading into a recession. so the logical conclusion would be to load up on growth stocks when the good times are ready to roll. the thing is, if it were that simple to time the market, they’d be a whole lot more billionaires running around, and i for one, would be on a yacht somewhere warm and exotic, not at a computer banging out this blog.
think about it – right now, we have successful veteran investors living through the exact economy but with polar opposite views on where we are in the cycle (think warren buffet vs. bill gross). and if these studs of the investing world don’t agree, what is the poor layman investor supposed to think and do? unless you have access to information that the rest of the investing community doesn’t, you’ll always be late to the game if you’re always switching styles.
so go ahead, buy that leopard print dress if you must. it’ll be far less costly to change up your fashion than your investing style. just think, you can look forward to all the laughs you’ll get when you look back at that picture of you in the “latest” fashion trend.