When Growth is Relatively Cheap It Will Outperform Value

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In “Using Dynamic Asset Allocation to Boost Returns” I showed that there are times when large cap or small cap are relatively cheap and will outperform the other.

The same thing is true for a dynamic asset allocation between growth and value. Although the average ratio of the Russell 1000 Growth forward looking P/E ratio to the Russell 1000 Value forward looking P/E ratio is normally high (1.45) the range of values shows that there are times when it gets over one standard deviation above or below that norm. When growth is relatively cheap, it will outperform value.

When growth is cheap it will outperform value

Currently growth and large are relatively cheap and small and value is relatively expensive. For that reason, the R1000 or S&P 500 should outperform the R2000 small cap value.

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David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. In addition to his financial writing, David is a co-author of The Haunting of Bob Cratchit.