What is this FAANG I keep hearing about?
If you have followed the news over the past few years, you’ve probably heard a lot of talk of FAANG stocks. What are they? Do you want to own them? Will they hurt when they bite? Our Senior Wealth Manager, Aaron Salmon, CFP® give you his thoughts on how to approach them.
What is a FAANG stock?
FAANG is an acronym that stands for Facebook, Apple, Amazon, Netflix and Google (now called Alphabet). These have been the high-flying tech stocks of the market over the past several years. Unlike the late 90’s when companies like Pets.com became tech stock darlings, these companies actually make money. Lots of money.
A market De-FAANG-ed
The FAANG companies are among the largest and most profitable companies in the world. Because of this, if one or more of them has a bad day in the market, it will be a bad day for most all stocks. Witness what happened when Tim Cook, CEO of Apple cut the profit estimate for the current quarter at Apple…a one-day 10% drop that drug the rest of the markets down with it.
Apple stock fell throughout the month of December, and then as a result of this additional 10% drop in early January was down almost 40% or over $400 billion in market value. That is more than the value of 496 of the 500 companies in the S&P 500.
To FAANG or not to FAANG
For the most part, we say yes to FAANG stocks. In fact, if you have any money invested at all, you probably already own these companies. Most of the FAANG stocks will be in the top 10 holdings of any large cap stock fund in your 401(k) or IRA. They are among the largest and most profitable companies in the world. Avoiding holding these companies would be difficult and probably unwise.
The next big FAANG….
This is the billion dollar question. Will an upstart, such as UBER or Lyft, command a trillion dollar valuation in a changing world where car ownership is less valued and ride-sharing increasingly prevalent? Will an existing tech company, such as Twitter, with a very large user base, that hasn’t fully realized how best to turn that into a profit suddenly figure it all out? Will Tesla, which makes an appealing product, be able to make produce enough of its cars inexpensively to become a profit machine? No one can see the future and know for sure the answer to this. Your best bet is to have exposure to all of these technologies and more in a well diversified portfolio. This is why we choose mutual funds and ETFs to diversify the risk of owning just a few individual stocks. Some will be winners and some will be losers, and owning them all give you the best chance of investment success.
Pathfinder Planning LLC provides personal financial planning advice and asset management for a simple fee to young adults and working families in North and South Carolina through group classes, one-on-one planning, and ongoing advice.
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