Investing in stocks is considered one of the most prudent things you can do in your financial planning. When you decide to put some of your money into stocks, the number of companies that you see on the stock market can be overwhelming.
When you first consider getting involved in investing in stocks or if you already do, you might have heard of the acronym “FANG” stocks. The acronym FANG stands for Facebook, Amazon, Netflix, and Google.
Although these four companies make up the acronym FANG, a fifth company, Apple is also frequently included. So, let’s try to understand a bit more about FANG stocks.
FANG Stocks Explained
When FANG stocks became a concept, they caused quite a sensation. These stocks came into existence post-2015 when the companies associated with these stocks showed enormous growth.
Investors prize these stocks event today in the United States. So, why is so much being said about FANG stocks? What is their significance, and is advisable to invest in them?
Coming down to the specifics, the four FANG companies registered phenomenally high growth in 2015 on Wall Street. Facebook, Amazon, Netflix, and Google gained 36%, 120%, 162%, and 45% respectively.
During that period the host of the TV show Mad Money, Jim Cramer created the term FANG stocks. Although he created it, he did not advocate it at the time.
Should We Invest in FANG Stocks?
Jim Cramer said FANG is bad. According to his theory, they tend to mask the performance of other stocks in the market. Moreover, he predicted no appreciable rise in FANG stocks or FAANG stocks if we include Apple Inc. in the mix.
In the stock market, you can’t just look at the growth of a select few stocks and hope to make big bucks out of them. There is a certain element of volatility that you have to accept.
It was this level of volatility that made Cramer feel that exclusively investing in FANG or FAANG stocks would be a big mistake. The term FANG or FAANG alludes to the phenomenal spike in the value of these stocks in 2015.
This phenomenally-high bullish trend is rarely seen in the stock market in the same way that a phenomenal slump is also rare.
If we digress to consider the dot-com bubble of the 2,000s or the recession of the mid-2,000s, it is an antithesis of the bullishness of FAANG stocks. Economies thrived and spiked just the way FAANG stocks did.
But when the bottom fell through, the bailouts were severe. People are still comparing the recession of the mid-2,000s to the Great Depression of the 1930s.
After a short decline in FAANG stocks post-2015, there was an appreciable recovery in 2017. However, by 2018 they declined again.
Cramer Warns Against FANG Stocks
It is this sort of scenario that Cramer warns against. It can happen any time, any day without warning. Just look at the havoc the coronavirus pandemic has created in the world economy and the stock markets.
Moving on to 2022, in many countries, coronavirus is on the decline. Economies are opening up and there is a certain level of optimism across the world.
If we look back on the historical performance of FAANG stocks you will see a steady upwards trend.
There has been an appreciable rise in each of these stocks, although the spikes were notably more severe than other less significant and lower value stocks.
It brings us to the theory that when you invest in stocks, the higher the risks, the better chances of appreciable profit. It is due to this risk factor that you would be advised not to put all your eggs in one basket.
Add a healthy mix of other low-value, less risky, and perhaps that you can use as an umbrella in case of a sudden decline in any of your FAANG assets.
The Downside of FANG Stocks
The main case against investing in FANG stocks is the way they are evaluated. To begin with, FANG stocks have high value, therefore you are putting out a lot of money when you decide to invest in FANG stocks.
The high volatility of these FANG stocks ushers in the risk that they might become overpriced.
Another downside of FANG stocks is that you don’t get dividends. As an investor, you don’t get anything out of these stocks in the interim, unlike many other stocks that give you an income through dividends.
So, you are putting your money into something very expensive but you won’t get anything out of it unless you sell it. Even then, the selling price of your stocks may not be as previously projected.
Because they are doing well in the market, you may feel that they are something worthwhile investing in.
However, considering the disadvantages that we have outlined here, you might be better off with alternate investments which we shall deal with further down.
Could You Already Be Invested in FANG Stocks?
How is that even possible? You might ask. The answer is quite surprising – you could be invested in FANG stocks for the mere reason as follows: If your 401k retirement plan from your employer includes an investment in an S&P 500 Index, you are already invested in these four companies.
The reason here is that Facebook, Amazon, Netflix, and Google are all included in the S&P 500 Index.
This index includes 500 of the biggest companies in the world that are listed on the New York Stock Exchange (NYSE) or the National Association of Securities Dealers Automated Quotations (NASDAQ).
From this point of view, you could already be invested in it.
But although you might have indirectly invested in these companies through your retirement plan from your employer, you would be best advised not to go all out investing them individually as well.
Too Hot to Handle
FAANG stocks today are still looking good but all is not as rosy on the surface as it seems. Although it looks great on the outside, many things are happening to these companies that can affect the value of their stock.
These companies are facing a considerable level of regulatory and antitrust actions. In recent years they have paid out billions of euros in fines and are still facing the flak, particularly in matters relating to platform-to-business (P2B) law.
In 2017 Google paid €2.42 billion in fines as a result of an anti-trust lawsuit. It paid a further €1.5 billion in 2019 and there are still cases pending against the company.
Facebook and Google have been facing attacks on their privacy policies. The data protection agency of France CNIL fined Google €50 million for failing to provide its users clear information about its data-sharing policies.
Netflix is another company under fire for unfair competition practices. Also, the company is reeling under rising debt.
Apple seems to be more or less in the clear. However, last year it paid out $30 million toward compensation to settle its infamous “bag check policy.”
In 2013 a class action suit was filed against the company for a policy that required individual bag checks of its employees’ personal belongings when they left the office.
This issue could have some effect on Apple Inc. stocks, but otherwise, there is not much more happening to upset the applecart (pun intended!)
As an investor, you might be attracted by the lure of rapid growth in company stocks. However, you need to dig in a bit deeper to understand what is happening behind the scenes.
The fact of the matter is that in the last six odd years since the huge spike in growth in 2015, FAANG stocks have been gradually rising amid the volatile fluctuations of the stock market.
The question is, as an investor, what do you do? Can you rely on these stocks? If so, what is the next step? If not, then also, what should you do?
What is the Best Policy for FAANG Stocks?
Ultimately, the predictions of Jim Cramer have not been entirely accurate. FAANG stocks do prevail on the market. However, there are some opposing forces at work against these giants in the global economy.
The best approach would be to keep a portion of FANG/FAANG stocks. Hold your cards close to your chest and perhaps you’d do well to dump some of them at the right time.
But for the rest of them, you could probably keep them. In the long run, over a considerable period of perhaps several years, and reap the benefits after even a decade.
But if you want to safeguard your money, then you can mix your FAANG stocks with safer and more stable investments.
Another investment option is the First Trust Dow Jones Internet Fund. It is a fund that gives you a clear picture linked to the Dow Jones Internet Index.
If you want to maintain healthy investments, diversifying your portfolio by investing in assets across the United States and the rest of the world can benefit you greatly.
You can vary your investments between high-risk, medium-risk, and low-risk stocks. They will have a damping effect on your more volatile investments, particularly with the high-risk ones.
Other Alternative Investment Options
So, with all the negative information FANG/FAANG stocks, is there anything else you can do? You can add contributions to your employer’s 401k retirement plan.
Most companies have a company match wherein the company puts an amount to match the amount you are adding and vice-versa.
It covers a variety of marketing indexes. So, although there may be some FANG stocks involved in it, there will likely be other investments like the Russell 2000 Fund, and so on. Maximizing your contributions into your 401k plan is a definite way of ensuring a substantial lump sum on retirement.
Another great idea is to pay 15% of your money into reputable mutual funds.
When you utilize your employer’s 401k company match, it’s a good idea to maximize your Roth IRA contributions.
Contrary to a lot of negative information about FANG stocks, they can be a great investment. But there is a certain level of uncertainty linked to these stocks.
So, although you might have these stocks as part of your employer’s 401k plan, don’t rely on them completely.
We have listed out some good investment options you can take, and showed you the way you can mitigate your investment risk by spreading it over various investment risk levels.
Be a cautious investor and keep your money safe while it multiplies.