How Markets Work and the FAANG Mentality

You may have heard the term before, FAANG. This is the combination of Facebook, Amazon, Apple, Netflix, and Google. A small group of the largest market movers that have posted impressive gains through the years. Investors have sunk their teeth into this powerful group of stocks but how much of the markets returns are because of FAANG stocks?

Over the past 10 years through December 31, 2018, the US broad market returned an annualized 13.4%. Excluding FAANG stocks, the market returned 12.6%. The 0.8 percentage increase resulted from FAANGs collective average of 30.4% yearly return over the past decade.

Many may be surprised but this theory of a select few of the top performing stocks drives the markets is very common. In fact, excluding the top 10% of performers each year from 1994 to 2018 would have reduced global market performance from 7.2% to 2.9%.

So it’s easy, just pick the top 10% performers this year and your likely to have good results next year right? Wrong, research has shown no reliable way to predict the top performing stocks. Looking at the top 10% of stocks by performance each year since 1994, less than a fifth on average of that group has ranked in the top 10% the following year.

So what’s the lesson? If investors are concentrated in a subset of stocks, they may be missing out on the very stocks that deliver the best performance the markets have to offer. An investment philosophy built around extreme diversification can help achieve reliable outcomes for investors over the long term.

Source: Dimensional Fund Advisors: How Markets Work and the FAANG Mentality.