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Identifying the “Next Great Trade”

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Identifying the “Next Great Trade”

Recent market performance has brought to the forefront of investors’ minds the darlings of the technology and media sectors: Facebook, Amazon, Netflix, Microsoft, Apple and Google, collectively referred to as FANMAG. Their performance has been noteworthy and matches those of some previous market darlings like Exxon, General Electric or AT&T during their peaks. However, just like previous market leaders, recent results are not predictive of future individual or sector performance versus other available opportunities.

In fact, many peers of the FANMAG trade were left behind as market laggards. Of the ten largest technology companies in 2013, only four outperformed the overall market through the end of 2020. It was not just the simple selection of technology or media as a strong future performer, one would have had to select the right companies inside of those sectors to capture this outperformance.    

And that is the downside of the stock picker philosophy. Having to pick the right stock at the right time and hold it for the appropriate time means you bear the risk of being wrong on any one of those factors, which can lead to investment setbacks.  The benefit of diversifying your portfolio across multiple considerations such as sector, company size and geography, is that you have the opportunity for potential exposure to the next outperforming asset class, but you also manage your risk by potentially limiting your exposure to asset classes that are underperforming.

The FANMAG stocks should be a part of a diversified portfolio, but these companies by themselves do not make up a diversified portfolio. If history is any guide, a new acronym or nickname will capture market attention in the future. 2020 saw many newly defined sectors or trades such as stay at home stocks, meme stocks or the reflation trade.   To identify these trends prior to 2020 would have been truly impossible.  

Please take some time to review the attached article from Dimensional Fund Advisors that explores these concepts in more detail.

 

The information in this article should not be considered investment advice to you, nor an offer to buy or sell any securities or financial instruments. The services, or investment strategies mentioned above may not be available to, or suitable, for you. Consult a financial advisor or tax professional before implementing any investment, tax or other strategy mentioned herein. The information herein is believed accurate as of the time it is presented, and it may become inaccurate or outdated with the passage of time. Past performance does not guarantee future performance. All investments may lose money.

Attachments

  1. FANMAGBecauseFAANGsAreSoYesterday.pdf 3/4/2021 4:18:10 PM