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This Is the Asset Class You Want in Your Portfolio Over the Next 10 Years

Value stocks are likely the only asset class to generate a 5%–10% real return over the coming decade, according to Research Affiliates.

Value stocks may be the one asset class you must have in your portfolio for the next decade.

After a decade-plus of underperformance and decline, value investing began to rebound in September 2020. While the emergence of the Delta variant interrupted the resurgence of value stocks, the asset class remains poised for a productive run, according to Research Affiliates, a California-based investment strategy firm. The company contends that value stocks are likely to generate between 5% and 10% real returns in the next 10 years, outpacing the forecast of other liquid assets, including the broader equity market.

A financial advisor can help with your asset allocation and determine whether value investing is right for you. Find an advisor today.

Value vs. Growth Stocks

A woman evaluates her stock portfolio on her computer. Value stocks are likely the only asset class to generate a 5%–10% real return over the coming decade, according to Research Affiliates.

When it comes to investing strategies, value investing and growth investing are two of the most popular and common schools of thought.

Value investing, a strategy championed by Warren Buffett, focuses on stocks that are undervalued and have the most potential to increase in value over time. Value stocks typically trade at a price below their book value. Growth investing, on the other hand, targets companies that are positioned to grow quickly and outpace their competitors by a substantial margin.

Value stocks are usually considered less volatile, have lower price-to-earnings ratios and pay investors dividends. Meanwhile, growth stocks are generally more volatile and have higher share prices. In the spirit of growing quickly, a growth company will usually reinvest profits instead of paying them out to investors as dividends.

How Value Stocks Have Fared Recently

In an article titled “Did I Miss The Value Turn?” Rob Arnott, Vitali Kalesnik and Lillian Wu of Research Affiliates explore the recent history of value stocks and what investors can expect in the post-pandemic world. The firm notes that value stocks were “out of favor, left behind in the years leading up to the pandemic by the high-flying tech darlings.” In fact, value stocks experienced a 34% drawdown relative to the broader equity market beginning in December 2006, according to Research Affiliates. More than a decade later, the pandemic punctuated that downward trend.

“Investors’ rejection of value stocks in the pandemic environment makes sense because these companies tend to have anemic growth and thin profit margins,” the authors wrote. “Very legitimate bankruptcy fears drove investors to shun these value stocks and pursue growth stocks, more aggressively even than during the tech bubble of 1999–2000.”

But a value rebound commenced in September 2020, as value stocks were priced at “extreme valuation discounts.” As more vaccines were distributed, investor confidence rose, Research Affiliates noted. Value stocks in the United States, Australia, as well as in the developing and emerging markets outperformed their respective equity markets by at least 8% between the time value was weakest compared to growth until June 2021.

However, the more transmissible Delta variant of COVID-19 disrupted the value rally. That interruption wasn’t expected to last, though.

“Governments at all levels are reacting, many by imposing new lockdowns, and the general public is displaying a renewed caution,” the Research Affiliates authors wrote. “Both are contributing to fresh fears about the economy. We believe the economic pullback and value’s retraction are temporary.”

Favorable Forecast for Value Stocks

A stockbroker wearing a mask monitors the market during the COVID-19 pandemic.

In forecasting the near future for value investing, Research Affiliates points to how value stocks have rebounded from economic downturns in the past. Citing earlier research the firm conducted, the authors note that value stocks have largely outperformed growth stocks in the two years that followed five of the last six recessions.

“As recessions near their end, value strategies rebalance into beat-up value stocks at their cheapest levels of the cycle,” Research Affiliates authors wrote. “And as the recovery advances, the cheaply priced value stocks, bought when most unloved, begin to reward the investors who had the courage to buy them.”

The investment research firm contends that while other liquid asset classes are priced to generate either negative or near-zero real returns (when factoring in taxes and inflation), value stocks are expected to generate between 5% and 10% over the next decade.

“The bottom line is that even after value’s recent partial rebound, the strategy in most regional markets is still priced at very attractive valuations,” Arnott, Kalesnik and Wu wrote. “In the U.S. and developed markets, value discounts have only been cheaper at the very height of the tech bubble and during the summer of 2020.”

That means now may be the time to incorporate value stocks into a diversified portfolio, according to Research Affiliates.

“Worldwide economic strength should accelerate as the emerging markets and other regions that were slow to vaccinate their populations make significant progress on that front,” the authors concluded. “The cyclical sectors of the economy, and consequently value investors, should benefit.

“We may never again see a better opportunity to buy value stocks,” they added.

Bottom Line

According to Research Affiliates, an investment research and strategy firm, value stocks are the asset class with the most upside over the next decade. Undervalued stocks are poised to post returns of between 5% and 10% in the coming decade, Research Affiliates predicts. While they started to surge in September 2020, the emergence of the Delta variant disrupted their rally. However, Research Affiliates believes these stocks can still be bought at a discount and belong in a well-diversified portfolio.

Investing Tips

  • If you’re not sure whether value or growth investing is right for you, consider working with a financial advisor who can help create an asset allocation to meet your needs. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can work with you to help achieve your retirement goals, get started now.
  • Don’t forget to factor in capital gains taxes when considering whether to sell an asset. Short-term gains are taxed as ordinary income, while long-term gains are taxed at more favorable rates. SmartAsset’s free Capital Gains Tax Calculator can help you determine your potential tax liability.

Photo credit: ©Алексей Белозерский, ©, ©