Value funds and growth funds are like records by

Bob Dylan

and

Marvin Gaye

: They're clearly different, but your collection isn't complete without both.

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How to Build a Low-Maintenance Portfolio

Questioning the Buy-and-Hold Strategy

Bonds Have a Place in Most Portfolios

Foreign Funds Lower Risk, But Won't Do the Opposite of U.S. Stocks

As usual, the market's gyrations give a false impression that growth and value funds are an either/or proposition, with value ruling the roost at present. Tech-light value-fund managers, who typically scour the market for bargains, have weathered the

Nasdaq Composite's

44% collapse over the past year much better than tech-heavy growth-fund skippers, who often pay steep prices for shares of companies with flashier earnings growth. As we'll see, the two styles' long-term returns are pretty similar and owning funds from both camps tends to give you the same gains with less volatility.

But money tends to flow into funds using the popular style at the time -- with deleterious consequence as inflows often rise just in time for a good streak's pause or end. For instance, cash that gushed out of value funds and into growth funds in 1998 and 1999 is

just starting to reverse field. At the same time, the battered Nasdaq has popped up 15% this month, giving sagging growth funds a jolt. With this in mind, now is a good time to remember the hard lesson we learned during the past two mercurial years: For the vast majority of fund investors it makes sense to own both growth and value funds, not one style to the exclusion of the other.

"Value and growth styles move in cycles and over the past two years those cycles have been particularly dramatic. Unless you're able to somehow predict these cycles, you should own both styles," says Bryan Olson, a director at

Charles Schwab's Center for Investment Research

.

The average big-cap value fund, which has about 10% of its money in tech stocks, is flat so far this year, while the average big-cap growth fund, with a third of its money in tech stocks, is down almost 13%. But as recently as 1999, when the average big-cap growth fund trounced its value counterpart by more than 30 percentage points,

some argued there was no reason to bother with value funds.

Market breezes and investor sentiment tend to back one style or the other in cycles, but the two styles have remarkably similar returns over the past 10 years. The average big-cap value fund, for instance, has a 13% annualized gain over the past decade with its average growth counterpart earning just half of one percentage point less.

Value or Growth?
Hard to say one style has trounced the other, given their returns over the past 10 years.

Source: Morningstar. Returns through April 27.

Despite these numbers, the styles' shorter-term divergence makes it easy to see why investors often wrap their arms around one instead of both. If we look at the performance of the

S&P 500/Barra Growth

and

S&P 500/Barra Value

indices, fund benchmarks where the

S&P 500

is split evenly by each stock's

price-to-book ratio, we find that growth topped value in seven of the past 10 calendar years. The average big-cap growth fund lorded over its value peers, except for the past two years.

That Last Step is a Doozy
If you only owned growth funds, the past couple of years haven't been great.

Source: Morningstar. Returns through April 27.

Though not logical, it is instinctive to assume an investment style that's in favor will keep chugging along, and that's what happened when tech put growth funds on its shoulders.

"Often when people decide one style is all you need, you're at that style's peak. People thought growth was all you need in December 1999 and that didn't work out too well," says Russ Kinnel, director of fund research at Chicago fund-tracker

Morningstar

. "In 1994 very logical and sane people were saying that all you needed for the long term was emerging markets."

The year before, the average emerging markets fund gained more than 70%. The category went on to lose money in five of the next seven calendar years, according to Morningstar.

Value and growth funds have less erratic cycles, but picking one style over the other can lead to some lean years.

"There are some pretty dramatic cycles over time, varying in length between a couple of quarters and up to three or five years. It's just not easy to predict at all," says Schwab's Olson.

From the start of 1981 through the third quarter of 1985, for instance, the value style has nearly double the average annual return of the growth style, according to Olson's tally. Growth trounced value from the third quarter of 1994 through the second quarter of last year. Value's current run started in last year's third quarter, but there's no telling how long it will last. The average annual divergence between the two styles during the past 25 years is more than 9 percentage points.

Given these unpredictable shifts, it's hard to argue against owning both. After all, it would be great if you chose growth if you needed your money before the Nasdaq peaked last March, but what if you needed your money now? By owning both styles, your portfolio will only get a cold when one strategy gets pneumonia.

Another reason to own a fund with each style is that their returns even out over time. If we look at 10-year holding periods ending in each of the past 15 years, the two styles are nearly even -- with the S&P 500 Barra Value index winning eight times.

A portfolio holding the average big-cap value fund and one holding the average big-cap growth fund would've both averaged about a 13% gain over the past 10 years, according to Morningstar. But they took a very different route, with the value portfolio chugging along and the growth portfolio going through more troubling gyrations. The worst 12-month loss for the value portfolio was just 5.6%, compared with a loss of 36.5% for the growth portfolio.

The value investor also boasts a much lower beta. Beta is a measure of a portfolio's volatility vs. the S&P 500. A number below 1.0 means a portfolio is less volatile than the index, while a higher number implies more sleepless nights.

If you're looking for a portfolio that offers access to growth's sudden gains without the same volatility, consider the case of a portfolio that's evenly split between the average growth and value fund. It equals the growth fund's average annual gain over the past 10 years, but with less volatility along the way.

"Over the long term, growth and value even out, but owning both offers a less bumpy ride," says Olson. "Rarely is value so explosive, but growth just gets hit really hard from time to time."

Sounds like a dollop of each makes sense.

Fund Junkie runs every Monday and Wednesday, as well as occasional dispatches. Ian McDonald writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

imcdonald@thestreet.com, but he cannot give specific financial advice.