Even if you’ve never heard of FAANG, chances are you have heard of all the stock components and maybe even contemplated an investment in one or more members, but is FAANG a good investment or bad investment?
What Is FAANG?
Let’s start from the beginning. FAANG stands for Facebook, Apple, Amazon, Netflix and Google. As you can probably tell, these are very big, very well known, technology stocks. They are also frequent investments among investors who only invest in a few individual stocks, people often called Main Street investors (as opposed to Wall Street investors).
One omission from the list is Microsoft, which is also a very large, very well known, technology company. Unlike the others, however, Microsoft’s stock is not well loved by Wall Street investors and analysts, in large part due to its sideways performance from 2002 to 2013. While its stock has recently done well, it still doesn’t have the same shine, or flair as the others. Perhaps this makes it a less “noisy” investment with fewer fair-weather, amateur, investors? That’s an article for another day.
For professional stock analysts and investors, FAANG represents a quick look at the “new” titans of American business. Each of these companies represents the mature, profitable, internet-based, mobile, online economy at the level of a full-size, profitable, Fortune 500 company, unlike say Twitter, which still struggles to make money.
For amateur investors, FAANG stocks represent a mirage of investing in “the future.” For these Main Street investors, an investment in Google, or Apple is because they “know” these high-tech companies, and they “know” they will go up because of how great their cutting edge technology is. Unfortunately, everything they know about, say, Apple (they have new iPhones!) is already baked into the price.
Is FAANG a Good Investment?
So, that raises the question of whether FAANG stocks are a smart investment. The answer, as always, depends upon your individual situation and investing goals, but beyond that, there are some things you need to know about investing in FAANG to avoid potential catastrophe.
First, don’t think that you are “special” in knowing about these companies. These are worldwide brands that are closely followed by every kind of investor, from the guy with $3,500 in an Ameritrade account, to billionaire hedge fund managers. And, yes, they know about the new iPhones.
Second, as tech titans, these stocks move both on their own accord (Hey, look! New iPhones are selling really well.), as well as representatives of technology (Uh, oh! Bad news for tech companies today…) Your best buying opportunities will be when the market overreacts to general technology news that doesn’t actually harm these individual stocks over the longer-term.
Third, know that these stocks tend to move together. Yes, only Apple sells iPhones, but more people buying iPhones means more people using Facebook, and more people using Netflix, and so on. These are all technology companies with big, international footprints. As far as your asset allocation goes, these all count as U.S. large-cap stocks. In other words, if you want to own all five FAANG stocks, you are going to need to diversify your portfolio elsewhere. From a diversification standpoint, these stocks are all the same.
Fourth, they won’t always go up. It’s easy to look now and wonder how there can even be a future without these companies, but it happens all the time. Go back to the 1990s and look at how many lists Cisco is on as a sure thing, even as a safe-pick for a 10-year or 20-year investment. Just look up at the top of this article to remember how many years Microsoft was a non-gainer even though there was once a time where a world without Microsoft was an anarchist pipe dream. Treat these investments like any other stock. Management and execution are crucial.
Fifth, these companies can be very volatile. If you are putting these in your diversified portfolio, they’ll need to be offset with more stable, value stocks, a nice stable mutual fund, or even bonds.
Finally, there will be news. The old maxim to buy the rumor and sell the news doesn’t always work as well with these companies as with others because so many people are constantly trying to predict what their next move will be. That beings said, buying the NEWS on these companies is a fool’s errand. Often the news gets overbought by household investors leading to a drop in the next few days. Couple that with some bad news, and you have a ‘bought at the top’ situation. Buy these stocks based on their long-term prospects and historical value only.
FAANG stocks are a good investment for the long-term, but they aren’t magic. They need to be monitored, and gains should be taken along the way, just like any other stock.
This is not an offer, or recommendation, to buy or sell securities. As the time of publication, the author owned Apple and Microsoft stock, however, that may change at any time. The author is not a financial advisor and does not hold himself out to be one. Consult your financial professionals for advice on your specific situation.