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offering the benefits of a diversified portfolio.
But sometimes owning uncorrelated assets
means eating big losses while the rest of the
market screams higher.
Value stocks After the dotcom bubble
deflated, value stocks—stocks that are cheap
relative to the value of their underlying busi-
nesses—went on a run of huge outperfor-
mance over growth stocks. But growth has
beaten the pants off value since the finan-
cial crisis (see graphic), led by high-growth
companies such as Amazon, Netflix, Google,
and Facebook that have monopolized investor
mindshare. The growing economic impact of
tech innovation, particularly in software; the
rising value of intangible assets like patents,
copyrights, and trademarks; and the willing-
ness of investors to pay extra for growth in a
world awash in capital have all contributed to
growth’s edge.
Still, investors think a turning point could
be near. Using a number of metrics, Cliff
Asness, head of investment giant AQR Capital
Management, showed in a recent piece that
growth stocks are more expensive now than
at any time other than the dotcom bubble. In
contrast, Asness writes, “Excluding the tech
bubble, the value of value is the cheapest it’s
ever been.”
OF COURSE, JUST BECAUSE something is cheap
doesn’t mean it can’t get cheaper. As our
examples show, each of these categories has a
black eye for a reason. That’s what makes the
current situation for investors so confusing: It
can seem like your only choices are to invest
in assets with good fundamentals but high
prices or to invest in assets with deteriorating
fundamentals but low prices. Yes, history tells
us that economic cycles will eventually boost
energy and metals stocks and value stocks
again, but it won’t tell us when.
The best move may be to worry less about
“when.” Many investors (including my firm)
favor a long-term strategy that involves
broad diversification. In practice, that often
means investing some capital in the areas of
the market that have been hit the hardest,
to take advantage of the cheap entry point.
When deciding whether to wade into beaten-
down asset classes, here are some lessons to
keep in mind:
Nothing works all the time Value investing has been repeatedly
vetted by academics, professional investors, and the iconic Warren
Buffett as an approach that works over the long term. But even
sound investment strategies are bound to go through painful
periods of underperformance. After all, the only reason any assets
earn a premium over the rate of inflation is because owning them
involves risks—and “sound” doesn’t mean “risk-free.”Diversification means always having to say you’re sorry The
main reason to diversify is to avoid concentrating your money in
a terrible-performing asset for an extended period. But spread-
ing your bets also means that at least part of your portfolio will be
sucking wind while the rest of it sprints ahead. You’re accepting
the occasional strikeout to increase your odds of winning the game.Don’t forget to rebalance Diversification works only if you period-
ically rebalance your asset allocations. In essence, this means selling
a little bit of what has done well to buy a little bit of what hasn’t. All
of the asset classes above experienced strong returns before their
fall from grace. Did you sell off a bit during the good times to bring
them back to their target weights? If not, their losses have been
even more painful for you—which could make it even harder to buy
now, when strategy might dictate that you should.Ben Carlson is director of institutional asset management at
Ritholtz Wealth Management. His firm has positions in value stock
funds, but not in any specific fund mentioned here.0
50
100
2007
150
200
250% RUSSELL 3000 GROWTH INDEX
RUSSELL 3000
VALUE INDEX
266.8%
121.1%
2010 2013 2016 2019
SOURCE: BLOOMBERG
UNDERVALUED
After a long stretch of being outperformed by growth stocks, value
stocks are cheaper in relative terms than they’ve been in decades.
But there’s no guarantee that they’ll rebound to close the gap.