Value has evolved. Diversification remains key.
By James Parkyn - PWL Capital - Montreal
Investors are struggling to make sense of today’s headlines. The news is hard to ignore—war in the Mideast, fuel prices, political turmoil. When uncertainty rises, it’s natural to feel the urge to act.
But history offers a useful reminder: The biggest risk to investors is often not the market itself, but how we respond to it. The challenge is staying grounded when everything around us feels unstable.
This is where strategy matters. A well-built portfolio isn’t designed for a single future—it’s designed to work across many possible outcomes. One of the most important ways to achieve that is through diversification—exposure to different markets, including those that may not be in favour today.
The value premium
As the great investment thinker Peter Bernstein said, “I view diversification not only as a survival strategy but as an aggressive strategy, because the next windfall might come from a surprising place. I want to make sure I’m exposed to it. Somebody once said that if you’re comfortable with everything you own, you’re not diversified.”
One of the key ways to increase diversification is by tilting your portfolio towards value stocks. Value stocks are companies trading at relatively low prices compared to their fundamentals—such as earnings or book value. They’re often mature businesses, sometimes out of favor, or simply less exciting than their high-growth counterparts.
Historically, value stocks have delivered higher returns than growth stocks. In the U.S. large-cap market, value stocks beat growth companies by 2.16% per year, according to data from 1926 to 2014. We call this the “value premium.”
Gone, then back again
But that premium hasn’t been consistent. From January 2015 to December 2024, value significantly underperformed growth. The premium during this period was -11.6% per year. This sparked a debate about whether the value premium has disappeared.
Then, during the recent market turbulence, the situation reversed again. Value started to strongly outperform. As of April 5, the Russell 1000 U.S. Value Index was up 2.4% for the year, handily beating the Russell 1000 U.S. Growth Index’s 9.1% loss, the Wall Street Journal reported. Meanwhile, the S&P 500 Index was down 3.8%, its worst quarter in nearly four years.
Is the value premium back? Or do we need to revisit what we think of as a value stock?
Not all cheap firms are equal
New research suggests this is the case. Value investing traditionally has meant buying what was cheap. But in a 2013 landmark paper, Robert Novy-Marx, an eminent finance professor at the Simon Business School at the University of Rochester, showed that not all cheap companies are the same. Some are cheap because they have weak fundamentals, while others are cheap despite being strong.
Novy-Marx found that companies with higher profitability tend to earn higher returns, even when they’re not “cheap.” In other words, price alone doesn’t define value. Profitability is also important.
Novy-Marx updated his findings in an important paper coauthored with Mamdouh Medhat of Dimensional Fund Advisors in October 2025. They found that growth firms reported higher profits than their historical average.
Meanwhile, traditional value stocks remained at their historical norms in terms of profitability. The story wasn’t that value had stopped working. It was that profitability became the main driver of returns.
Valuation and profitability—both important
This led to the conclusion that the best way to capture value is to consider both valuation and profitability. The evidence is that more profitable firms should have higher returns, even if they’re expensive—while cheap companies may not if they’re not profitable. The best value opportunities are reasonably priced stocks with strong profitability.
As Novy-Marx said in the 2013 paper, “Investment managers should carefully consider their portfolios’ exposure to profitability, as it is a key driver of returns across multiple investment classes.”
Dimensional’s discipline about managing portfolios based on academic science has led them to integrate profitability into how they manage their equity funds.
Dimensional excels at identifying academic findings that can be implemented in the products that we use in our clients’ portfolios. For this reason, we’ve been working with them since 2003.
Many shades of diversification
Other forms of diversification of course remain important, too. For example, U.S. stocks strongly outperformed Canadian and international counterparts for over a decade after the financial crisis ended in 2009. Yet, Canadian and international stocks flipped the story in 2025, paying off for investors with oversized gains.
Being broadly diversified within an asset class is also crucial. As economist Hendrik Bessembinder found in a key paper, just 4% of companies accounted for all U.S. stock market wealth creation above a risk-free T-bill investment from 1926 to 2023. The majority of stocks—51.6%—actually had negative compound returns during this period.
Being diversified between stocks and bonds also reduces risk. These two asset classes tend to have a negative correlation during crises, with bonds offering a cushion when stocks sell off.
Free lunch
Whatever the market, the prescription for successful investing remains diversification. It allows investors either to earn the same return with lower risk, or a higher return for the same risk.
This is why it’s often described as a “free lunch”—maybe the only free lunch in finance.
One of the most important results of diversification is peace of mind. Knowing that our investments are well diversified makes it easier to ignore turbulent news and stay focused on the long-term payoff.
Find more commentary on personal finance and investing, our podcast, past blog posts, eBooks, model portfolios and market statistics on the website of PWL Capital’s Parkyn-Doyon La Rochelle team and our Capital Topics website.