Episode description
THE RISK YOU DIDN’T KNOW YOU HAVE
Move over FANG. The new crew is AMATA.
Remember “FAANG?” Facebook, Apple, Amazon, Netflix, and Google? They were the talk for quite some time. But, things always change. Netflix and Facebook dropped out of the top 5, Google changed its name, and Tesla became the new darling of the market.
The new crew, let’s call it AMATA, is Apple, Microsoft, Amazon, Tesla, Alphabet.
These 5 stocks compose:
42% of the NASDAQ 100
22% of the S&P500
That is a high and concerning # from our perspective.
That’s called concentrated risk.
Everyone owns them. Institutions, hedge funds, the bulge bracket firms, the big banks, individual accounts at Fido, Schwab, TD, Robinhood, WeBull, et al. Some people unwittingly own index funds or ETF’s with high exposure PLUS owning individual stock positions.
Everyone owns these 5. Even to some extent unwittingly large exposures via index funds and ETF's that replicate these indices.
The S&P500 Index is the most widely owned equity-exposure index.
Retirement plans are a major driver of this, as is the decade + long wave of money moving from active management to passive (index funds & ETF's).
This means that you're largely at the whim of how these 5 companies perform, and how the remainder of assets in your accounts is risk-managed. You're also at the whim of what large institutions and hedge funds decide to do with their long positions in these 5.
Now, can you determine some of the most common characteristics of these 5? And determine what their course will look like over the next 3-5 years?
Is this "diversified"?
In 1999 just before the dot-com crash and extended bear market in tech, 3 of the 6 largest companies by market cap were Microsoft, Cisco, and Intel. After a massive run-up in stock price in the late 90’s, all three of these companies crashed, and returns were fairly flat for the next 8 years leading into the Global Financial Crisis of 2008. That’s not to say that the AMATA crew will experience the same. But, we are in a transitioning economic environment globally. And when you’re considering risk and diversification, having this much exposure to these 5 is a caution flag for us.
Knowing what you own is important.
This podcast is for educational purposes only. Nothing mentioned here should be deemed financial advice. Consult a professional if you’re looking for guidance.
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