If Americans were tested on the difference between growth and value investing, most would fail.
In a survey by American Century Investments of Kansas City, Mo., of 300 investors who are primary or joint decision-makers on investment issues, fewer than one in five correctly answered at least seven of 10 basic questions about growth and value investments.
Only one lone respondent nailed all 10 questions.
Ellen Fairbanks, a planner with The ACACIA Group, in Pittsburgh said the survey results didn't surprise her. "Even if you've gone over [value versus growth], a month later it's like they've never heard it," she said of some of her clients. "This is lingo we use all the time, but it's not lingo they particularly identify with in their day-to-day lives. If they're with you a while, eventually it penetrates."
It's important that clients understand the difference between value and growth and how they balance each other as economic cycles turn.
"It's a concern when one or the other [growth or value] doesn't do anything in their portfolio," she said. "They don't understand why they might want to keep it."
More than two-thirds of investors agreed with the statement: "Diversifying my investments across value and growth investments helps to reduce my portfolio risk."
But only 15% claimed to feel knowledgeable about growth and value investments.
Although fuzzy on the details, investors seem to have some sense what went on in the markets in the 1990s. About two-thirds knew that growth funds outpaced value funds during the 1990s. However, just half knew that value funds led during 2000 and 2001.
More than half of all investors surveyed correctly identified a growth stock as "a stock in a company that is demonstrating better-than-average profit and earnings gains."
Growth, as in Trees?
But nearly a quarter said that a growth stock "offers a guaranteed rate of growth tied to the consumer price index," while 2% said it is "a stock in a company that specializes in agriculture, lumber, landscaping and other organic products that are grown."
Roughly 15% believed a growth stock is all of those things, while 9% simply didn't know. Similarly, 49% correctly identified a value stock as "a stock that has a low price-to-book ratio." Yet, 14% believed a value stock is "a stock in a fast-growing company that specializes in high-value, low-cost products, such as a discount retailer," and 8% defined a value stock as "a stock in a company that specializes in valuable goods, such as precious metals and jewelry."