When the FTSE100 nosedived in at the turn of the century, it was fifteen years later those exposed to that market would see the index return to its December 1999 level.
Scares of ‘millennium bugs’, of course, were used to take valuations of stocks back to reasonable levels, and such excuses were probably used to make the short sellers even more money (they bet on the market falling).
In between times, those of you incorrectly exposed to such a downturn in your pensions, investments or ISAs (or equivalent), could do no more than not open your six-monthly valuations.
That’s when I learned one of my biggest lessons: What can get cheap, can get a whole lot cheaper, and something that falls by 50%, isn’t cheap, and can fall by 50% on numerous occasions, sucking everyone in on the way.
Meditation and mindfulness teaches us to be present a prerequisite to managing the stock market.
Today we have the FAANG (Facebook, Amazon, Apple, Netflix, Google) stocks, or the MAGA stocks, and countless views on their future and value.
So what risk do they offer your pensions and ISAs?
In life, our biggest strengths can often be our biggest weaknesses – another analogy linked to the market. Where there is a big potential for loss, there is a big potential for gain, and vice versa.
Some can argue that FAANG or technology stocks are different this time. That’s not as important as understanding your risks in pursuit of the best returns.
If you have bought a technology fund, you will be sure what you are buying, and what the risk is. If you bought another fund thinking you are now diversifying, you could easily buy FAANGs again, and in abundance, particularly through passive funds, which create another potential risk – liquidity.
The Baillie Gifford American fund, for example, has considerable exposure to the above stocks and so a downturn in your FAANGs could hit you in numerous places (concentration risk). Any real thought of their downfall would force a sell off which would be multiplied across the board. Be sure your financial adviser has that concentration risk fully covered.
Is it fair to group FAANGs together? No, not really. They are very different, at very different stages of development, but are all in a similar nightclub together and dance together.
The iPhone helps people go on to google, who sell adverts, which help people shop on Amazon. That’s the party.
More recently, their growth rates have been declining, markets can see that, and whilst they are all priced to perfection, the last two months have illustrated that top heaviness. The key will be whether or not they can reinvent themselves into something else.
Facebook appears to have slipped out of the noose they created by giving data to Cambridge Analytica, but some people still use it. Younger people dumped it many years ago but Facebook bought up that competition in WhatsApp and Instagram but not Snapchat.
I rarely use any of the above because of Facebook’s antics, but it’s not evident the wider public think the same. However, the feel is that Facebook is indeed boring, but useful to organise and keep in touch.
I’m not sure that low barrier of entry makes them worth over half a trillion dollars, and the biggest one day drop of any US company in history in July of $120bn, will serve as a reminder of that.
Are they top heavy? For sure. Will they fall further? Who knows. The wealthier investors reduced their exposure in the middle of the year when valuations looked stretched.
For example, in July, Netflix had returned 106% year to date, with Amazon rumbling behind at 55%. FAANG stocks accounted for 44% of the return of the S&P 500’s return at that point.
There are many risks and whilst Sept to October is not a good time generally for tech stocks, the more obvious attacks or support on their price will come from regulation, which comes from lobby groups (sponsors) of course.
… Follow that money.
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About the author
Peter McGahan is Chief Executive of Independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority.Last modified: June 10, 2021