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The Viability of the Value Premium Part I: Keeping the Faith Thumbnail

The Viability of the Value Premium Part I: Keeping the Faith

If you have been a Merit Wealth client, you know the drill: 

We have already built your low-cost, globally diversified portfolio to help you achieve your personal goals. We’ve done so by tilting your portfolio toward or away from long-term sources of expected returns – and their risks. When those risks arise, if your goals haven’t changed, neither should your portfolio. 

Let’s assume you’ve already embraced this advice, and are relativelycomfortable maintaining your investment resolve. You also may be aware that investments concentrated in value stockshave delivered higher long-term returns than their growth stock counterparts. In fact, value stocks have outperformed growth stocks by 4.8 percent per year over the period of 1927–2017.

But it’s also no secret that the value premium has been hiding for quite a while. At least in U.S. markets, value stocks have been underperforming relative to growth stocks for around a decade.  

This has led some investors to wonder whether the value premium has lost its mojo. Even among financial academics and practitioners, healthy debate exists over what to make of the past decade. Are the underwhelming returns a temporary, if painfully long bump in the road, or does it represent a permanent new reality for value stocks? 

I won’t keep you in suspense:

Nobody knows for sure what the future holds; we cannot guarantee success. But based on historical and ongoing evidence, we have found no compelling reason to alter our approach to value investing. 

In this five-part series, we’ll explore why we feel it remains in your best interest to keep the faith on value investing, relative to your personal financial goals and risk tolerances. 

I’ll be back in touch soon with our next segment: the historical context of the value premium. In the meantime, don’t hesitate to be in touch if we can add value (no pun intended!) to your evidence-based investment strategies.   

Jeff Griswold