Value Premium Investing – How Viable Is It Today?

If you’ve been an evidence-based investor for a while, you know the drill when looking for value premium returns.

You’ve already built your low-cost, globally diversified portfolio to help you achieve your personal goals. You’ve done so by tilting your portfolio toward or away from long-term sources of expected returns – and their risks. When those risks arise, if your goals haven’t changed, neither should your portfolio.

Let’s assume you’ve already embraced this advice, and are relatively comfortable maintaining your investment resolve. You also may be aware that investments concentrated in value stocks have delivered higher long-term returns than their growth stock counterparts.

“Value stocks have outperformed growth stocks by 4.8 percent per year over the period of 1927–2017.”

But it’s also no secret that the value premium has been hiding for quite a while. At least in U.S. markets, value stocks have been underperforming relative to growth stocks for around a decade.

Has the Value Premium Lost its Mojo?

This has led some investors to wonder whether the value premium has lost its mojo. Even among financial academics and practitioners, healthy debate exists over what to make of the past decade. Are the underwhelming returns a temporary, if painfully long bump in the road, or does it represent a permanent new reality for value stocks?

We won’t keep you in suspense:

Nobody knows for sure what the future holds; we cannot guarantee success. But based on historical and ongoing evidence, we have found no compelling reason to alter our approach to value investing.

Let’s explore why we feel it remains in your best interest to keep the faith on value investing (relative to your personal financial goals and risk tolerances).

Historical Context

In 1992, professors Eugene Fama and Ken French published a landmark study in The Journal of Finance, “The Cross-Section of Expected Stock Returns.” Their work gave birth to the Fama/French three-factor model, which suggested three sources of expected returns could explain almost all of the differences in returns among different portfolio builds:

1. The equity premium

– Stocks (equities) have returned more than bonds (fixed income).

2. The small-cap premium

– Small-company stocks have returned more than large-company stocks (although continued inquiry has added an important footnote to this finding).

3. The value premium

– Value company stocks have returned more than growth company stocks. Value companies are those that appear to be under- or more fairly valued by the market, relative to growth companies; they exhibit lower ratios between their stock price vs. their various business metrics such as book value, earnings, and cash flow.

What does this mean to you as an investor? It suggests financial analysts can take any two investment portfolios and compare their long-term performance using just these three factors. With more than 90% accuracy, the analysis should explain why one portfolio returned, say, 10% annualized over 20 years, while the other one only returned 5%.

To put it another way, the Fama/French three-factor model showed us that, costs aside, it barely matters whether each security in your portfolio has been hand-picked by a high-priced expert, or chosen at random by a group of dart-throwing monkeys. Almost all that matters is how you’ve allocated your holdings among (1) stocks vs. bonds, (2) small-cap vs. large-cap stocks, and (3) value vs. growth stocks. Almost any other stock-picking or market-timing efforts are far more likely to add unnecessary costs and/or unwarranted risks than to improve your returns.

This is powerful stuff to build on. In 2014, Fama and French published a five-factor asset pricing model, which now explains nearly 100% of the cross-section of expected returns. Whether returns among different portfolio builds can be explained by three or a few more factors …

If your investment portfolio were a house, your particular allocation to value stocks is an essential, load-bearing wall. It should not be abandoned lightly.

The Role of Valuations in Forecasting Value Stock Returns

So, why do savvy investors and academics alike put so much weight on valuations when trying to peek into the future of value stocks? It’s because, historically, the price you pay for a stock—relative to fundamentals like its earnings or book value—has told us a lot about what kind of returns you can expect down the road.

Simply put, when value stocks are trading at unusually low prices compared to their underlying metrics, they’re starting off on a better foot. This “discount” means there’s more room for positive surprises, and it’s often been a springboard for higher future returns once the market eventually recognizes their true worth.

Case in point: When small-value stocks are priced significantly below their historical averages compared to broader markets, they’re effectively on sale. While we can’t know exactly when or how the market will adjust, lower valuations have repeatedly set the stage for better-than-average long-term returns. It’s not magic—just the math of buying low and (hopefully) selling high.

Comparing Small-Value and Market-Based Portfolios

So, how have these ideas played out in practice lately? Let’s zoom in on the last 15 years—a notably challenging stretch for value stocks. If you’d constructed a globally diversified, market-based portfolio, you might have allocated about half to U.S. Stocks, about 37% to developed international markets, and the remaining 12–13% to emerging markets. Historically, such a portfolio would reflect the global market’s natural blend.

Despite stacking the deck in favor of broader market performance, this market-based approach delivered an annual return of 5.84%. By contrast, a globally diversified portfolio with a small-value tilt—not just owning the stock market, but favoring those underappreciated, smaller companies trading at lower valuations—would have eked out a higher annualized return of 6.33%.

It’s worth pausing on that. Even during a period when value strategies faced stiff headwinds and growth stocks were all the rage, the small-value allocation quietly outpaced the more mainstream approach. This echoes lessons of the past, like after the dot-com bubble, when stretched valuations set the stage for a powerful comeback from value—and especially small-value—stocks.

Small-Value Stocks: How Have They Fared Since the Great Recession?

You might have heard a chorus of headlines declaring “value investing is dead”—especially since U.S. value stocks, and small-value in particular, haven’t exactly dazzled compared to the mighty S&P 500 over the past decade and a half. From 2008 through July 2023, small-value stocks in the U.S. did trail the S&P by just over a percentage point per year. Not thrilling, but let’s not start tearing down those load-bearing walls just yet.

Interestingly, when we peek outside the U.S., the story changes. International small-value stocks actually outperformed their respective broad-market indexes. In developed markets abroad, for example, small-value delivered returns that were nearly two percentage points higher per year than the general market. The gap was even wider in emerging markets, where small-value topped broad indexes by more than two percentage points annually.

Stepping back to look at a globally diversified portfolio, the takeaway is clear: Over this 15-year stretch, a small-value tilt—allocated sensibly across U.S., developed international, and emerging markets—produced better returns than just sticking with market-cap-weighted benchmarks. Even during a tough period for value strategies, the diversified small-value approach came out ahead, providing a sturdy foundation, much like the cornerstones that hold your investment house together.

Choosing Your Path: Traditional 60/40 vs. Diversified Factor Exposure

With a solid grasp of Fama and French’s research in your back pocket, you might be wondering how best to apply it to your own portfolio. Historically, many investors have followed a “traditional” approach—a blend of 60% stocks and 40% bonds. On the surface, this recipe is straightforward, widely discussed in mainstream financial circles, and typically tracks common benchmarks like the S&P 500 or the Bloomberg US Aggregate Bond Index. The familiarity can be comforting, especially during times when everyone’s boat appears to be rocking in the same storm.

However, there’s a catch: most of the risk in a 60/40 portfolio actually comes from one factor—market beta. In plain English, that means your investments are largely at the mercy of broad market swings. When the market is up, everyone cheers. But when prolonged downturns hit—think the stagflation of the 1970s, the tech bust in the early 2000s, or the financial crisis in 2008—the ride can be bumpy, and recoveries may span years, even decades. Plus, as market valuations rise, future expected returns tend to fall, setting the stage for more challenging decades ahead.

The Case for Diversification Across Factors

On the other side lies the diversified, factor-based approach. Instead of concentrating risk in just market movements, you spread your bets across several independent dimensions—size, value, and possibly a couple more pillars from the Fama/French tool chest. The promise? Greater resilience through different market environments, and a portfolio built on a broader array of return sources.

Of course, there’s no such thing as a free lunch. A more diversified, factor-based portfolio is likely to zig when conventional wisdom zags. It may trail behind popular benchmarks in certain seasons, sparking what’s known as “tracking error regret”—the risk of feeling left out when the Joneses down the street appear to have a windfall while your house is being quietly reinforced.

Navigating the Trade-Off

The truth is, both routes ask you to accept a certain kind of discomfort. Clinging to conventional allocations may feel easier in the short run, yet it exposes you to concentrated risks and the potential for extended periods of disappointment. A diversified, factor-based approach improves your odds of long-term success—but demands the patience to weather odd years when your returns don’t mirror the nightly news.

So, as you plot your investment journey, ask yourself: Would you rather be conventionally wrong, or unconventionally right? Evidence favors the latter, especially with a mix of value, size, and other robust factors supporting your financial foundation. After all, it’s not about keeping pace with the herd—it’s about engineering a structure that stands strong through the storms.

When Valuations Climb, Returns Tend to Shrink

So where does that leave us today, as we cast our eyes toward the horizon of future returns? Here’s the catch: while the historical market “beta premium”—the extra return stocks have delivered over risk-free assets—has been robust (about 8–9% per year over the very long run), most financial economists now expect this premium to dwindle going forward.

Why? Simply put, current market valuations are lofty. Back in 1927, the commonly cited CAPE ratio (which compares prices to average earnings over the past decade) hovered around 13. Fast forward to today, and it’s more than doubled—north of 30. When valuations are high relative to historical averages, it means much of the market’s optimism about future cash flows is already “baked in.” The implication: future returns are likely to be lower than what long-term history might suggest.

With a thinner margin for error—a smaller expected premium, but the same dose of volatility—investors are left with a higher risk of disappointing (or even negative) stock returns, especially if our expectations remain anchored to the heady days of the past. In other words, high valuations build a taller ladder, but one from which the step down can be steeper if growth doesn’t deliver.

The Investor’s Long Haul

Still, we understand. A decade is a long time to tolerate disappointing numbers, while awaiting an expected reward. For many of us, our children are about the only other misbehaving “investment” we’re willing to put up with for that long.

However, as is the case for any other source of expected investment returns (including the equity premium itself), we prefer to consider value stock performance over a decade or more, since the expected outperformance can go into hiding for years on end – and often has.

In a 2015 CFA Institute post, Enterprising Investor contributor Dougal Williams commented (emphasis ours): “A ‘disappearing’ value premium, even over a 10-year stretch, is nothing new. In fact, since the late 1970s, 27% of all rolling 10-year periods have seen a negative value premium.” Of course, on the flip side, this means 73% of them delivered a positive premium.

These seem like pretty good odds. However, when a source of expected return does resurface after a hiatus, it’s often in the form of an exuberant leap nobody saw coming, except in hindsight. For example, in the same CFA Institute post, Williams pointed out that growth stocks had outperformed value by 2.1% annually for the decade ending October 2000. Then, abruptly, the tables turned; value bested growth by 35% over the next five months. Based largely on this single surge, value ended up outperforming growth by 2.4% for the 10 years ending May 2001.

In short, only those who can tolerate the doldrums tend to still be around to reap the unpredictably timed windfalls that often dramatically impact your end returns. As Vitaliy Katsenelson of Contrarian Edge has suggested more recently, “value investing is not dead; it is just waiting until all value managers lose their hair and capitulate.”

The Road Less Traveled: Comfort vs. Diversification

Now, let’s shine a light on a crossroads every investor faces: Do you stick with the familiar, cozy route of a standard 60/40 stock-bond split, or do you branch out and embrace a more diversified (and decidedly more eccentric) portfolio mix?

Sticking with the classic approach feels safe – and psychologically, there’s comfort in not straying from what everyone else is doing. After all, if the S&P 500 takes a nosedive and your portfolio follows suit, you won’t be lamenting alone. There’s plenty of company when things go sideways, and tracking your performance against daily headlines is simple (if occasionally demoralizing). The downside is that when the entire market stumbles—think 1973–74, the dot-com crash, or 2008—there’s little shelter from the storm. Worse yet, long droughts can occur when even “safe” portfolios underperform something as boring as a Treasury bill.

On the flip side, pursuing diversification—by owning broader asset types and factors like value and small caps—means consciously steering off the beaten path. Practically, this can translate into stretches where your returns look nothing like the market’s, often prompting pangs of “am I doing the wrong thing?” if popular benchmarks are surging while you are not. The psychological discomfort of being different—“failing unconventionally” as some put it—can be very real. Enduring those periods requires a firm resolve and the willingness to focus on long-term probabilities over short-term appearances.

Here’s the catch: Both approaches come with their own flavor of regret. With the conventional path, you risk missing your goals during market downturns. With the diversified route, you risk feeling out of step and second-guessing your decisions during periods of underperformance. But if history and the factors we’ve discussed have taught us anything, investing isn’t about keeping up appearances. It’s about sculpting a robust, efficient portfolio—one with enough diversification to weather market surprises and enough conviction to stick with it when your neighbor’s portfolio seems to be sprinting ahead.

Ultimately, the better odds usually go to those who diversify across risk factors—stomaching those awkward silent stretches in pursuit of rare, but crucial, windfalls. The trick is learning to ignore the temptation of “relativism”—that persistent voice comparing you to the nearest index—since long-term investing success remains refreshingly independent of today’s market gossip.

Going Global

It’s also worth noting: While the United States is not the entire world, much of the press covering the value premium has focused on U.S. performance. Over the past decade or so, international value stocks have often performed more robustly than their U.S. counterparts.

In a 2018 ETF.com post, financial author Larry Swedroe commented: “If value is ‘dead,’ we should find confirming evidence in other [non-U.S.] markets.” He then used data from Ken French’s website to show that the premium was alive and well in international developed markets in the then-current 10-year stretch. Depending on which business metric he used, the value premium ranged from 1.9% (book/price) to 4.1% (earnings/price) from 2008–2017.

In financial academia, where assumptions are best validated by presenting across multiple markets and various timeframes, this suggests U.S. value stocks are more likely experiencing a random setback than defining a new global norm.

Popularity Contests and Future Expected Returns

In a more recent piece, Swedroe also rebutted the suggestion that value investing has become a victim of its own success. That is, as more investors have incorporated the value factor into their portfolios, has old-fashioned supply-and-demand eliminated its expected premium?

We don’t know for sure, but we don’t think so. It’s more likely that investors who cannot tolerate the recent underperformance are unwittingly setting the stage for the value factor’s comeback.

Think about it: Whenever one investor wants to sell their shares, somebody else has to buy them, or the transaction cannot occur. As some investors waiver and sell their value stocks at lowered prices, other bargain-hunting buyers swoop in and position themselves for future expected growth. Eventually the pendulum is likely to swing. In a chicken-or-egg relationship, sentiments shift as prices crawl or lurch back upward. The next thing you know (although nobody knows just when), value has once again resurfaced, stronger than ever. The cycle begins anew.

That’s how efficient markets have worked for decades if not centuries. It’s how they’re expected to continue to work moving forward. In other words, in an ironic twist, lower current prices actually suggest future higher returns.

Supporting Evidence From The Spread

We can point to supporting evidence from a stock pricing measurement known as the spread. In this case, the spread measures the difference between the price buyers want to pay for a stock (the bid) vs. the price sellers want to receive (the ask). Wider spreads mean bid/ask prices are far apart; narrower spreads mean they’re closer together.

As Swedroe observed in his paper, “If overcrowding has occurred, we should see a dramatic narrowing in [spread] valuations, as cash flowing into value stocks and out of growth stocks impacts relative prices.” After analyzing the spreads among various market factors, he concluded: “The bottom line is that we see no evidence that cash flows have caused the ex-ante value premium to narrow, either in small stocks or large stocks.”

To put it another way, J.P. Morgan’s chief U.S. equity strategist was quoted as follows in a June 2019 MarketWatch column (emphasis ours): “[V]alue is currently trading at the biggest discount ever, and offers the largest premium over the last 30 years.” The strategist was referring to future, not current expected premiums. In other words, for those who stick with the value factor, solid evidence remains that the best is yet to come.

Examining Flows: Value vs. Growth Stocks

So, what about the flow of dollars between value and growth stocks? Contrary to popular belief, the data do not show a significant wave of investors abandoning growth in favor of value. If there were a flood of capital pouring into value stocks, we’d likely witness narrowing spreads and shrinking valuation gaps—but that’s simply not the case.

In fact, market statistics suggest that inflows into value stocks have remained relatively balanced when viewed alongside their growth counterparts. There’s been no overwhelming shift or runaway migration that would explain away the premium as a product of investor overcrowding. Instead, it appears the market dynamic remains healthy, with neither side dominating the field.

How ETFs Influence the Value Premium

What about exchange-traded funds (ETFs) that focus on factors like value, size, or momentum? Recent research by David Blitz sheds some light here. He found that not all ETFs are playing on the same side of the value premium field.

On one hand, so-called “smart beta” ETFs are intentionally constructed to capture specific factor premiums, including value. These funds aim to tilt portfolios toward the characteristics—like undervalued stocks—that, over time, have delivered higher expected returns. On the other hand, many traditional, broad-market ETFs may inadvertently bet against those same factors by hewing close to the broad benchmarks, often overweighting stocks that have already become expensive or exhibit less of the desired factor.

Put simply, there’s a tug-of-war underway. While smart beta ETFs are gathering exposure to factors like value, conventional ETFs sometimes end up on the opposite side, effectively leaning toward growth or other characteristics. Yet, despite popular assumptions, Blitz’s findings suggest there hasn’t been an overwhelming flow of investment dollars specifically into value stocks at the expense of growth.

This dynamic between ETFs demonstrates that not all investor behavior is pushing value premiums in the same direction—and the supposed “crowding” into value has been anything but one-sided.

What Matters for Value Premium Investing in the End

So, where does this leave us? We remain confident that the value premium is far more likely slumbering than dead. Unfortunately, nobody can predict when it will awaken, or whether it will do so gradually or in a rush. We can’t even offer an iron-clad guarantee we’re correct.

For better or worse, this is the nature of market risks and their expected rewards. Suffice it to say, the market’s inherent uncertainties challenge the most disciplined investors. Even the late, great Vanguard founder John Bogle once said about his own, roughly 50/50 stock/bond mix:

“I spend about half of my time wondering why I have so much in stocks, and about half wondering why I have so little.”

So, if you have your doubts, that’s perfectly understandable. But before you actually change your investment strategies or abandon value investing, consider this 1999 sentiment from The Journal of Portfolio Management’s founding editor Peter Bernstein. His words are as relevant today as when he wrote them 20 years ago:

“Even the most brilliant of mathematical geniuses will never be able to tell us what the future holds. In the end, what matters is the quality of our decisions in the face of uncertainty.”

So, what still makes for quality decisions?

Global diversification is a huge part of it. By spreading your risks across multiple sources of expected returns, you can better manage the very real risks involved in pursuing them. In the frightening face of uncertainty, patient resolve and objective evidence are also among your greatest guides.

Last but not least, we’re here to help as well. Questions? Comments? Time for a talk? Let us know!