Staying Balanced in the Midst of Market Chaos
Investing for a comfortable and secure retirement requires the discipline to resist being pulled into speculative and overly volatile situations. The excitable media and financial industry will continue to introduce new themes and provide headlines to fan the fires of fear and/or greed, depending on the situation.
Several years ago, it was the fast-growing economies of the BRIC’s (Brazil, Russia, India, and China). Last year it was Bitcoin. These theme-based concepts usually end poorly, but they may pale in comparison to the interest and capital that have flowed into the tech stocks that have become known by the acronym of FANG (Facebook, Amazon, Netflix and Google).
By including Apple in the mix, we change this acronym to FAANG. The performance of the S&P 500 has clearly been skewed over the last few years by these five companies, as each has seemed to emerge as clear category leaders. Over the last few years, the FAANG’s have captured a worship like following rarely seen before, and portfolio managers have felt increasingly compelled to add them to their holdings.
The portfolio I manage (FACTS® SMA) focuses heavily on the trustworthiness of corporate governance issues. Through my screening process, I came to see several troubling issues imbedded within each of these companies – issues that are often conveniently overlooked by portfolio managers seeking to juice their fund’s return. As a result, we were able to avoid them.
I do not think anyone would doubt that technology will continue to play an ever increased role in our society, but it might be wise to anticipate, if not expect, that new names will be introduced and compete. There is nothing like fat profit margins in this hyper competitive world to attract new products and innovations.
My perspective is that the kind of crowd behavior we are seeing around the FAANGs has the potential to create valuations that lead to big losses for investors that come in too late. History is rife with examples of exciting new technologies that have changed world, only to see the public invest late in market leaders and sadly lose money. The introduction of television, radio, and the first Internet wave of the late 1990’s are examples of this.
It is important to not confuse a fad with a trend, and also to remember that industries that grow enormously are often led by new names over time. How many people now remember companies like RCA, Pan Am, Kodak, or Woolworth’s?
The issue now facing the investors with the FAANGS is that they have already had a few years of dynamic growth, and I believe are already too big to maintain this indefinitely into the future. There are virtually no instances in history of companies maintaining a 40% growth rate over 10 years.
Once growth begins to slow, future prospects often erode further, and then momentum flees quickly. Sometimes government regulations arise, or perhaps anti-trust discussions pop up, but at a certain point near the peak, the trajectory simply changes. To most experienced market participants, it seems that time has come to the FAANG’s. Each of these companies have seen their uptrends broken, and each are experiencing social and/or business pressures that are unlikely to disappear.
Many investors are now experiencing an unfamiliar level of overall volatility. With the recent explosion of indexed mutual funds and ETF’s, many investors are exposed to risks that they don’t fully understand. Many who thought they did a good job of diversifying their investments among several funds are likely to still have over-exposure in today’s most popular companies – especially the FAANG’s.
It may be a good time to “de-FAANG” your portfolio. At the very least, do a deep analysis of your holdings, and make sure they coincide with your risk profile and years to retirement. If you are interested in having us conduct this review, please feel free to contact us at firstname.lastname@example.org.
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