Over the past decade a group of technology stocks known as FAANG (Facebook, Apple, Amazon, Netflix, and Google - now Alphabet) have captured the attention of investors worldwide. These companies have exhibited remarkable growth and have consistently outperformed broader stock market indices.
With this great performance it’s natural for investors to extrapolate this growth into the future and want to invest in these companies. In fact, many people have come to in recent years holding their stocks.
At first glance this isn’t a bad idea. These are massive companies that are well-ingrained in society today. It’s hard to picture a future where many of us aren’t using an iPhone, searching on Google, and watching Netflix. So why not buy stock in these companies?
Let’s take a quick step back and let me remind you of GE…
GE was considered a bellwether for the stock market and American economy throughout much of the 1900s. It was one of the original 30 stocks in the Dow Jones back in 1896. It weathered the Great Depression and emerged as a leader in industries like power generation, aviation, and healthcare. GE's stock demonstrated stability and growth, making it a favored investment choice for many throughout the 20th century.
But things seemed to change in the 2000s. Since then GE stock has underperformed the market substantially.
So when we discuss investing in the FAANG stocks (or any individual stock for that matter), ask yourself what you would do if you had caught the last 20 years of GE investment performance, and not the first 100? Would you hold on forever? Or potentially get sick of the drag on your portfolio and lock in a loss?
Buying individual stocks works for some investors, and it’s possible the FAANG stocks will continue to perform well, but there’s a significant risk to concentrating your investments in individual stocks.
Ask yourself how much of your portfolio you would be ok losing if you picked the wrong company, or held it during the wrong time period? If it underperformed the market for 5 years would you be able to hold on? What about 10 years?
These questions are difficult to answer, but just thinking through these scenarios can be helpful.