The Importance of Staying Disciplined in Asset Classes, Ep #224

Over the years doing this podcast, I have clearly stated that you cannot time the market and you should never try. But what about asset classes? Can you predict when one asset class will do better than another? Should you try? In this episode of Best in Wealth, I look at how value stocks and growth stocks have performed in the last few years. I will nail down why staying disciplined in asset classes is just as important as not timing the market. Check it out!

Outline of This Episode

• [1:15] The importance of values and discipline
• [5:54] What are growth and value stocks?
• [8:27] The good news for growth stocks
• [10:50] Why you have to stay disciplined
• [12:39] What can you do to stay disciplined?

What are growth and value stocks?

According to Fama-French, companies that trade similar to what they would be worth if they liquidated are trading close to their “book value.” That is a value stock. Their prices are low compared to their intrinsic value. Companies that trade far from their book-to-market value are growth stocks. Growth stocks are undervalued and have the potential to grow significantly.

Growth stocks typically consist of the companies we know and buy from every single day. They take their profits and reinvest them to continue to grow. A value stock might be a great company but things are happening outside their control and lowering the stock price. Airlines were considered value stocks during the pandemic when no one was flying.

The recent history of growth and value stocks

Value stocks have been doing really well during the last two years (ending 12/31/22). Before that, growth stocks were doing well. Between July 2017 and June 2020, growth stocks averaged 17.6% per year while value averaged –3.1% per year. Growth beat value by 20.7% per year for three years.

You likely have a growth fund and a value fund in your 401k. If you were looking at short-term returns, you might have gone “I’m getting rid of this value fund” and decided to buy more growth stocks.

You would rationalize the decision because you had heard that you cannot time the stock market. But timing asset classes like value and growth is a loser’s game, too. What if you could not take it anymore? Let’s say you did not get out of the market but you did decide to sell the value stocks and bought more growth. Why wouldn’t you?

Here is why you should not have: Because over the next two-and-half years, from July 2020 to December 2022, value averaged 28.7% per year. Growth averaged 6.6%. That is a difference of 22%. That is exactly why we cannot time asset classes. And it is why you have to stay disciplined.

What can you do to stay disciplined?

So far in 2023, growth is beating value. No one can time when growth or value will do better. No one can time when small will do better than large. No one can time when international is going to do better than the US. We need to stay disciplined in all of our asset classes.

Staying disciplined starts by creating an investment policy statement. If you do not have one, you need one. It is the only way to stay objective about your money. Find a fee-only certified financial planner that can help you. You will not regret the decision.

Secondly, you need to figure out what your risk level is. What can your stomach handle? Get concentrated in each type of asset class and stay disciplined in your lane. Then, strategically rebalance when growth and value stocks aren’t performing. Doing that can add half a percent per year to your portfolio.

To get the full picture, make sure you listen to the whole episode!

Resources Mentioned

• The Value of Discipline in Value Investing

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Podcast Disclaimer:

The Best In Wealth Podcast is hosted by Scott Wellens. Scott Wellens is the principal at Fortress Planning Group. Fortress Planning Group is a registered investment advisory firm regulated by the Securities Act of Wisconsin in accordance and compliance with securities laws and regulations. Fortress Planning Group does not render or offer to render personalized investment or tax advice through the Best In Wealth Podcast. The information provided is for informational purposes only and does not constitute financial, tax, investment or legal advice.

About the author, Scott Wellens

Scott Wellens, CFP® is an investment advisor and founder of Fortress Planning Group. After earning his Bachelor of Science degree from the University of Wisconsin-Oshkosh, Scott quickly ascended to become a Vice President of North American Sales at a major regional provider of telecommunications infrastructure. While financially successful in this role, Scott searched for ways to pursue his passion related to financial literacy and providing financial freedom for both his own family and others. During his search, Scott became curious about the significant gap he found in the financial services sector: he was unable to find a comprehensive financial planner that maintained a family stewardship lens without being attached to financial products. Scott decided to fill that gap by creating his own planning firm that maintains a strong passion for comprehensive, unbiased wealth planning that is genuinely client-centered.

Scott resides in Menomonee Falls, WI with his family. He is the father of three active and independent daughters who keep him on his toes. Scott is an active community member, serving on the Hamilton Education Foundation Board, serves as a Dave Ramsey Financial Peace facilitator and leads the All Pro Dad’s group at their local elementary school. Scott enjoys spending his free time visiting state parks with his family, reading, and watching the Milwaukee Bucks and the Green Bay Packers win ball games.

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