Investing in Growth Stocks vs. Value Stocks

Abstract

This article examines whether the performance in the investment in value stocks vs. growth stocks is different in terms of the holding period and stock market conditions. The study analyzes the performance of high- and low-P/E portfolios for the quarterly and monthly rebalancing as well as the annual rebalancing, using a sample period of April 1986 to March 2003, divided into a general bull market period of April 1986 to March 2000 and a recent bear market period of April 2000 to March 2003. The findings show that regardless of the frequency of portfolio rebalancing, high-P/E portfolios outperform low-P/E portfolios especially for the bull market period. However, when adjusted for the risk inherent in different P/E portfolios, low-P/E portfolios outperform high-P/E portfolios for all rebalancing frequencies. Finally, the evidence shows that more frequent rebalancing tends to improve the performance of low-P/E portfolios but reduces the performance of high-P/E portfolios.

TOPICS: Equity portfolio management, performance measurement, portfolio construction