Beware Style Counsel From Market Pros

If you're planning to rebalance your portfolio for 2009, here's a tip: Ignore the investing pundits.

Each year, financial prognosticators offer predictions and advise you to allocate accordingly. The problem is crystal balls don't exist. In addition to largely missing the great 2008 meltdown, consider all their exhortations a year ago to shift into large growth-oriented stocks and mutual funds.

In theory, at least, big fast-growing companies would weather the slowdown thanks to their girth and global operations. In a late 2007 Russell Investments survey, most investment managers were "favoring growth over value, whether it's large-cap, midcap or small-cap," a press release of the survey reported.

"Generally speaking, value stocks are more economically sensitive to the economy…. Value stocks had such a long and strong run. Many managers expect the growth run of 2007 is likely to continue into 2008," the release said.

Well, the 2008 results are in and, lo, it isn't large growth companies but small value-oriented ones that performed best. In addition, even though the value style of investing leans toward financial companies, value still beat growth across all market caps despite the financial crisis.

As the chart below shows, small value mutual funds lost 32% in 2008 compared with 41% for large growth funds, according to Morningstar. In addition, small value beat small growth, midcap value beat midcap growth, and large value beat large growth. The same is true for the Russell Indexes. On top of that, the small-cap Russell 2000 Index (-34%) beat the large-cap Russell 1000 (-38%) and S&P 500 (-38%).

Granted, last year's overall bloodbath in the stock market means "it's more a matter of who got beaten up the least," says Sam Stovall, chief investment strategist for Standard & Poor's equity research team. Stovall also says that for the S&P indexes, while small value also did best (-31%) among the major style groups, large growth (-36%) beat large value (-42%).

All this shows why it pays to be skeptical of any du jour investing themes. If you followed the conventional wisdom of late 2007 and early 2008 and shifted into large-growth stocks while cutting back on small-value stocks, you likely didn't do much better -- and may have even fared worse.

Even some value managers are puzzled. "I'm still trying to figure it out," says John Buckingham, chief investment officer for value-based firm Al Frank Asset Management and portfolio manager of the Al Frank Fund (VALUX). He says growth outperformed value for a good part of the past two years, including much of 2008, and "in our view, in times of turmoil value doesn't do that well."

What does this mean for 2009? Russell's latest investment manager survey says the professionals are sticking with "their preference for growth investing vs. value, but the gap in attractiveness between growth and value has shrunk considerably."

As we've advised in the past, if you're not wedded to either camp you can always avoid the debate by putting a good chunk of the money you want in stocks into a diverse stock fund such as Vanguard Total Stock Market Index (VTSMX), which gives you growth, value and everything in between.