• Ben Maimon

How Markets Work and the FAANG Mentality

Updated: Jan 7



The stocks commonly referred to by the FAANG moniker— Facebook, Amazon, Apple, Netflix, and Google (now trading as Alphabet)—have posted impressive gains through the years, with all now worth many times their initial-public-offering prices. The notion of FAANG stocks as a powerful group holding sway over the markets has sunk its teeth into some investors. But how much of the market’s recent returns are attributable to FAANG stocks? And does their performance point to a change in the markets? Over the 10 years through December 31, 2018, the US broad market (1) returned an annualized 13.4%, as shown in Exhibit 1. Excluding FAANG stocks, the market returned 12.6%. The 0.8-percentage-point bump resulted from the FAANGs collectively averaging a 30.4% yearly return over the decade.

Investors may be surprised to learn that it is actually common for a subset of stocks to drive a sizable portion of the overall market return. Exhibit 2 shows that excluding the top 10% of performers each year from 1994 (2) to 2018 (3) would have reduced global market performance from 7.2% to 2.9%.


Further excluding the best 25% of performers would have turned a positive return into a relatively large negative return. This lesson also applies to capturing the premiums associated with a company’s size and its price-to-book ratio. Research by Eugene Fama and Kenneth French (”Migration,” 2006) provides evidence that these premiums are driven in large part by a subset of stocks migrating across the market.

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, on average less than a fifth of that group has ranked in the top 10% the following year.


The tendency for strong market performance to be concentrated in a subset of stocks is therefore also a cautionary tale about the importance of diversification— investors with concentrated portfolios may actually miss out on the very stocks that deliver the best of what the market has to offer.


An investment approach built around broad diversification can help achieve a more reliable outcome for investors over the long term—sharp acronym or not.


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Source: Dimensional Fund Advisors LP.


Maimon Wealth Management Ltd. ("MWM") is a Registered Investment Advisor ("RIA") with the U.S. Securities and Exchange Commission (“SEC”). Advisory services are only offered to clients or prospective clients where MWM and its representatives are properly licensed or exempt from licensure.


The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.


The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.


Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results.


No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. All investments include a risk of loss that clients should be prepared to bear. Asset Allocation may be used in an effort to manage risk and enhance returns. It does not, however, guarantee a profit or protect against loss. Diversification does not ensure a profit or guarantee against loss.

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