Investors often underperform by following investing strategies that are based on perception rather than long-term research or reality. Even though there have been many studies showing what does work, several stock investing myths continue to exist. Understanding and avoiding these myths can make a substantial difference in wealth over your lifetime.
Strong revenue and earnings growth attract attention. This is particularly the case for companies operating in emerging industries or selling innovative products and services. Such growth makes for great news stories and everybody likes a winner. Therefore, it only stands to reason that soaring growth should lead to soaring stock prices.
The reality is different. Long-term data published in the 2013 Ibbotson SBBI Classic Yearbook (a compendium of historical data on stock and bond performance) shows that value beats growth. Over the period from 1928 through 2012, a portfolio invested in large-cap growth stocks realized an annualized return of 8.8%. Over the same period, a portfolio invested in large-cap value stocks realized an annualized return of 11.0%. If the difference does not seem like much, consider that in just 10 years, your brokerage account balance would be more than 22% larger by investing in value stocks than growth stocks. And as you keep investing, the gap becomes even larger.
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