There’s a lot of jargon in the financial sector. Last month, I introduced you to the acronym, SPIVA, in the article Batting on the same side. This month, you can learn about FAANG.
Are you the kind of person who always wants to get better and perform faster? If so, you might have the type of mindset that means you try to ‘beat the market’.
I know a friend-of-a-friend who thought like that. She imagined it was safe to bet on the giant tech companies in the US stock exchange known as FAANG. (Until 2017, the acronym was FANG because it didn’t include Apple stock.)
F = Facebook (now Meta)
A = Apple
A = Amazon
N = Netflix
G = Google (now Alphabet)
These stocks make up a large percentage of the S&P 500, and did really well for a decade. However, they have now started falling back to earth. They’re down an average of 37% since the start of 2022.
For the past six months, the person I know has been ‘taking a bath’, big-time. (This is a slang term which refers to an investor who experiences a significant loss from an investment.)
It’s not the first time this has happened. Remember Enron? This was a big, trusted company that many people had invested all their money in but it turned out to be a massive fraud.
Here’s a recent visual from our friends at Finalytiq. In this chart, they have compared the GraniteShares FAANG ETP which invests in 20% of each of the individual stocks with the MSCI ACWI Index (MSCI’s flagship global equity index).
As you can see, the general trend is downwards.
For an even more up-to-the-minute look, search the NYSE FANG+ index on Google.
You can look at the historic performance of individual stocks, but that doesn’t predict the future. No stock hangs around forever (it’s called ‘survivorship’ – another bit of financial jargon).
SPIVA, as mentioned last month, keeps a Persistence Scorecard. It shows that few funds consistently outrank their peers or benchmarks, regardless of asset class or style focus.
It reinforces the idea that choosing between active funds on the basis of previous outperformance is a misguided strategy as there is a 96.5% chance that a top-quartile fund will not stay in the top quartile consistently for the next four years. There is also a trend for poor-performing funds to close within the next three-five years.
According to Dimensional, more than one in five US stocks delist within five years, and only a fifth of stocks survive and outperform the market over 20 years. The chance of any single stock continuously outperforming the market is about 30%. Winners are no more likely to achieve this than losers.
As you will often read, past performance is not a guide to future results.
What this means to you
An encouraging track record or familiarity with a company might encourage you to invest in it and dissuade you from diversifying, but this isn’t wise.
What you don’t want is a tightly concentrated portfolio, since that leaves you at risk. What you do want is a widely diversified portfolio. That’s what you get when we build you a financial plan made up of a range of low-cost funds. Our approach has been tried, tested, and proven to work long-term.
In short, diversification wins! Sink your teeth into that.