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Should You Have FAAMG Stock Concentration or Moderation?

Should you have FAAMG stock concentration or moderation?

I’m getting a lot of questions that are a variation of one major question: “Do you own FAANG/FAAMG stocks?”

My answer? No—well at least not individually.

Here’s one reason why…

Concentration. The FAAMG stock concentration (Facebook (FB), Amazon (AMZN), Apple (APPL), Microsoft (MSFT), and Google (GOOGL)) in the U.S. equity market has been rising all year. They are now the five largest U.S. stocks and now account for 22% of total S&P 500 market cap.

Yeah, 22%.

That’s up from 19% in January 2020 and up from 16% a year ago. These five stocks have a combined weight equal to the combined weight of stocks 142 through 500 in the S&P 500.

But wait, there’s more…

These stocks have increased 35% year-to-date and each of them set a new record high…this month!

What about the other 495 stocks in the S&P 500? According to Goldman Sachs’ David Kostin, those 495 stocks have a -5% year-to-date return.

Need a visual? Don’t worry, we’ve got you covered… (Thanks, David Kostin & Goldman.)

Market Cap of 5 Largest Companies Chart

Five Largest Stocks Return YTD Chart

No wonder everyone is out buying these stocks and then acting like people who don’t own them are crazy and missing the boat.

I’m not going to invoke a comparison to 2000…these stocks actually have excellent profit margins and strong balance sheets. But the problem is that these stocks present a huge risk TO THE INDEX.

Kostin goes on to cite an example: “…if the FAAMG stocks declined by 10%, in order to keep the market trading flat the bottom 100 S&P 500 stocks would have to rise by a collective 90%.”

So, one of two things will happen – either these stocks get hammered down to fall in line with the rest of the market, OR, the rest of the market catches up.

The term “market breadth” reflects this. A narrow market breadth means only a few stocks are leading the index higher. In the past, narrow market breadth has usually taken place before a sell-off.

What does market breadth look like now? It’s the narrowest it has been in the past 20 years.

Market Breadth Narrowest Level in 20 Years Chart

If you are a regular reader of this blog, you know that I’d never advocate using this or anything else as a market timing tool…narrow market breadth can exist a long time before a downturn materializes.

I’m saying BE CAREFUL.

And I’m saying that if you are an indexer and heavily exposed to an S&P 500 ETF (say through your TSP), you need to understand that you have MASSIVE exposure to these five stocks and you’d be wise not to add to that exposure in other accounts.

Moderation is important, and it’s the opposite of concentration. Have moderation.

Finally – remember our old ‘fr-enemy’ loss aversion…any losses you experience will hurt twice as much as any joy you felt from the gains. You can get where you want to go with an investment strategy that does not include massive exposure to these five securities.

Oh, and call us if that sounds good to you.

And for you clients out there in our Core ETF Strategy, don’t worry…you own APPROPRIATE/MODERATE exposure to these FAAMG stocks through ETFs, which is another reason we don’t own them directly in our other strategies.

Keep (carefully) looking forward,



What’s Next?

The future of the economic recovery will be decided by another lockdown – is one coming?

Important Disclosure Information for “Should you have FAAMG stock concentration or moderation?”

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Monument Wealth Management), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.

All indexes referenced are unmanaged and cannot be invested into directly. The economic forecasts set forth may not develop as predicted. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Monument Wealth Management. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Monument Wealth Management is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice.

A copy of Monument Wealth Management’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

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David B. Armstrong, CFA

President & Co-Founder

Dave got into the industry when he discovered his passion for finance in his mid-20’s. He’s a combat veteran and served as an officer in the United States Marines Corps on both active duty and in the reserves, retiring at the rank of Lieutenant Colonel. While serving on active duty, Dave was unable to spend money on deployments, so he became a self-taught investor. Along with a few bucks cash as a bouncer, his investing performance grew to be good....

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