Should I choose growth or value? It's often the first question investors tackle when looking for a mutual fund to play a central role in their portfolio.
Growth fund managers look for companies whose earnings will grow fast, such as Google. The rationale is that stock prices generally move in tandem with earnings. A company with accelerated earnings growth will attract investors and command a higher stock price.
Value fund managers invest in stocks that are trading for less than their fair value. They look for low price-earnings ratios and the stocks of companies that have fallen out of favor but remain sound businesses, such as Hewlett-Packard.
The line between the two fund categories isn't absolute and neither strategy consistently outperforms the other. Over the last year, large-cap value funds have returned an average 23 percent, compared with 20 percent for large-cap growth funds. Over the last 3- and 5-year periods, large-cap growth funds have edged out their value counterparts by 1 percentage point or less.
But there is a third option: blend funds. These funds combine both strategies and provide more consistent performance in varying market conditions.Associated Press