A Quantitative Look at Returns from Value and Growth Stock Portfolios

As a long term NAIC/BI investor, I have started taking a closer look at returns of growth stocks in comparison with other asset classes, e.g., value stocks, international stocks, REITs, and bonds. There is very little data showing historic return for NAIC/BI portfolios.

The NAIC Growth Fund is one possible source. It has had a total return (based on NAV) since its inception in 1991 of 9.6%. However, a portfolio of three Vanguard index funds consisting on 25% large cap growth, 50% mid cap growth, and 25% small cap growth funds returned 12.0% for the same period. It may not be fair to use the NAIC Growth Fund for comparison since it is a relatively small fund and it incurs fixed expenses to comply with various SEC requirements. It cannot operate as efficiently as an individual investor’s portfolio.

Anecdotally, some NAIC/BI investors have done very well over time. It appears that some of their success results from using the NAIC/BI methodology as one tool in a larger investing toolkit. These investors use the NAIC/BI methodology to evaluate growth stocks, especially growth and quality, but they also apply a value approach when buying or selling. They buy high quality growth stocks that are on sale and sell them when they become overvalued. I would expect the returns of these portfolios to be closer in return and risk to the blended or value portfolio described below.

The Data

Since there are no readily available data to track portfolios of stocks selected using the NAIC/BI methodology, the next best sources are market indices and low cost index funds. Let’s assume that the average NAIC/BI investor will do about as well as the market average for growth stocks. (I know, we are all above average investors, but let’s make this assumption anyway.) That allows us to use the large cap growth, mid cap growth, and small cap growth indices as surrogates. While it is an imperfect approach at best, stocks are categorized as either “growth” or “value” stocks using metrics such price/book, price/sales, and price/earnings ratios. A “blend” is generally a combination of both growth and value stocks.

The NAIC/BI Portfolio Management Workbook recommends diversification by sector and industry. It also recommends diversification by company size, with a suggested allocation of 25% large cap, 50% mid cap, and 25% small cap. Since market indices and index funds are already diversified by sector and industry, we can focus on company size.The following tables compare several different portfolios from 1985-2006. Growth, value, and blended portfolios are compared with a total market stock fund. The tables show compound annual growth rates (CAGR). They show how $10,000 grows over the 21 year period with and without annual rebalancing. They also show correlations with a board U.S. market index and an international stock index (MCSI/EAFE).

Table 1 assumes the recommended NAIC/BI company size diversification.

Table 1

Since many NAIC/BI portfolios seem to be weighted more heavily in large cap stocks, Table 2 assumes an allocation of 50% large cap, 25% mid cap, and 25% small cap.

Table 2

Note: the actual data was compiled by several participants on the Bogleheads Investment Forum. One of the forum members created a brilliant spreadsheet that allows comparisons of various asset allocations over different time periods between 1972 to 2006. The tables above use this spreadsheet.


  • A broadly diversified portfolio of growth stocks has a higher risk (as measured by standard deviation) and lower return than a portfolio of either value stocks or a combination of growth and value stocks.
  • A broadly diversified portfolio of either value stocks or a combination of growth and value stocks provides a more favorable risk reward ratio.
  • The difference in long term return between growth and value stock portfolios is significant. $10,000 invested in 1985 in a diversified growth stock portfolio (25% large cap, 50% mid cap, and 25% small cap grew to $126,992 at the end of 2006. While $10,000 in vested in a diversified value stock portfolio (same size weightings) grew to $200,624 a difference of $73,632.

Implications for Individual Investors

The NAIC/BI methodology is still the best available to individual investors to evaluate and compare growth stocks, especially those stocks with somewhat consistent earnings. The methodology works consistently and in many ways it does as well, or better, than the complex discounted cash flow models used by analysts. So please don’t read this posting as a criticism of the NAIC/BI methodology. It’s not.

The above data lead to the conclusion that growth stocks should not be the only asset class in a portfolio, even when the growth stocks are diversified by company size. Going one step further, growth stocks should not be the predominant asset class in any portfolio.

Some argue that the relative returns of growth and value stocks oscillate over long periods of time and that growth stocks are now likely to outperform value stocks. Put another way, they say that value stocks have had their day and growth stocks should better in the near future. I am not so sure.

However, even if growth and value stocks have comparable returns in the near term, the variability of those returns still matters. Standard deviation (comparing portfolio return with the total market) is one measure of variability or risk. Growth stocks are inherently riskier than value stocks. We have all seen this. Changes in estimated growth often result in dramatic price movements. Consider what happens when a high growth company misses its estimated quarterly earnings by a small amount.

Tables 1 and 2 show two academic measures of risk and return, the Sharpe ratio and the Sortino ratio. Follow the links if you want to learn more about these ratios. They attempt to quantify risk and return in a single number. A higher number means a more favorable risk return ratio for the investor. In both portfolios, a portfolio made up entirely of growth stocks has the worst risk reward ratio.

Some Thoughts on Asset Allocation

There is a growing body of literature emphasizing the importance of asset allocation in a portfolio. Strategically, an individual investor should make several basic portfolio decisions, in this order: (1) the overall allocation between equities and fixed income; (2) within the equity component, the allocation between U.S. and international stocks; (3) within the U.S. equity component, the allocations among large, medium, and small cap stocks, and the allocations between growth and value stocks; and (4) within the international equity component, allocations among European, Pacific, and emerging markets. Growth stocks have a place, but should not represent the entire portfolio.

If you are intrigued by this concept, use the Diehards Forum spreadsheet to compare portfolios with different asset classes. A well balanced portfolio increases return and reduces risk. Index funds or exchange traded funds (ETFs) that follow capitalization weighted indices can be used to build a portfolio that has tax efficiency and low cost.

Hope this analysis is helpful.  Comments are welcomed.