On September 5th Secretary of State Menuchin announced that the US and China will conduct trade talks. With that announcement, the Dow Jones Industrial Average rose almost 400 points or about 2% in one day. Such daily market movements are seeming to become routine. But it isn’t making investors feel good.
After more than 10 years of more or less positive gains from US stocks, the last couple of years are starting to feel like a roller coaster ride: up one day then a Tweet and stocks pivot downward. For investors it seems like chaos with uncertainty and quick changes becoming more the norm.
What should you do?
The temptation of jumping on the technology train after it has left the station
One of the most common concerns we are hearing in this environment is “I have all this cash that is earning nothing and I want it to grow. What can I do?”
Often the temptation is to invest it in one of the popular tech stocks such as Facebook, Apple, Amazon, Netflix, or Google (now known as Alphabet)—FAANG stocks. “They have done so well. They are the future. What could possibly go wrong?”—We’ve heard this all before and it does not always end well this late into a bull market.
During my time interviewing portfolio managers at Scudder Investments in Boston in the 2000s, I can remember asking one portfolio manager, “Do you think it is over for value stocks?” His portfolio was not allowed to invest in the phenomenally performing Internet growth stocks. I asked the question because it seemed as though technology was the future and his value stock strategy seemed old fashioned. His answer was “No. The markets always perform in cycles. We believe value stocks will eventually come around.” It took some time but eventually the high-flying growth stocks collapsed and value stocks resurfaced as more reliable investments that paid attractive dividends.
Over time, growth and value stocks have taken turns leading the stock market. Over the last 10 years, growth stocks have had an unprecedented run, exceeding the returns of value stocks by a significant margin. If you believe that stocks will eventually ‘revert to the mean’1, then being diversified and not holding too much in growth stocks is a more balanced investment approach.
While I love the convenience of ordering on Amazon, watching whatever I want when I want on Netflix, searching the Internet with Google to find good Dutch oven recipes for Scout camping trips and checking up on my friends on Facebook, there are limits to how high any stock can go. All you have to do is go back in time.
In 1885, Charles Dow created the Dow Jones Industrial Average which was intended to represent companies that were the backbone of the US economy. The initial average was comprised of 14 companies and 12 of them were railroads. While the average has been revised many times since, railroads played a central role in the US economy at that time. Today, they represent an insignificant percentage of major US stock indices. Their time came and went.
At some point, there will be other disruptors which may replace today’s FAANG stocks. I am not waiting to wake up one morning and find out that it’s over for them. Now more than ever it is time to make sure your investments are balanced across growth and value stocks.
Do you know how much you own in large growth or technology stocks? Give us a call. We’re here to help.
Lyman H. Jackson
1 Revert to the mean: I know this term conjures up your high school or college statistics class but, it basically means that over time, asset prices and returns eventually return to their long-term average levels.
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