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Investment Returns are Based on Expected and Unexpected Factors

Investment Returns are Based on Expected and Unexpected Factors

November 21, 2020

The fundamentals of investing are logical. In many cases investing can seem anything but logical. 

Investing in FAANG stocks produced extraordinarily high returns during the last decade. A return was expected, the extraordinary high return was unexpected.

Over the last decade FAANG stocks did exceptionally well. FAANG represents Facebook, Amazon, Apple, Netflix, and Google’s parent company Alphabet.

If you owned those five stocks in proportion to their market capitalization, the average annual return would have been 34 per cent for the 10 years ending August 2020. This information was provided by Professor Kenneth French.

Investors of FAANG stocks expected a return. The extraordinarily high return of 34 per cent was unexpected. Otherwise everyone you know would have bought those stocks, while no owner of those stocks during that decade would want to sell. 

Will the FAANG stocks perform that well in the future? If everyone thought that, then there would be very few sellers and therefore virtually impossible for you to buy those stocks.

The decision-making process for buying and selling investments is no different than most other decisions you make in your life. You have a specific objective, you weigh the facts, and then make a decision. 

Second guess your decision all you want.  A correct decision is based on your understanding of the pros and cons at the time you made the decision.

You do not have the luxury of knowing what unexpected events might occur in the future and how those events might affect your investing outcome.

You control the information you have when an investment decision is made. 

Peter Watson is registered with Aligned Capital Partners Inc. (ACPI) to provide investment advice. Investment products are provided by ACPI. ACPI is a member of the Investment Industry Regulatory Organization of Canada. The opinions expressed are those of the author and not necessarily those of ACPI. Peter Watson provides wealth management services through Watson Investments.