The Mistake New Investors Keep Making When Buying Big-Name Stocks Like Apple
Think investing is easy if you stick to a sure thing? Those big businesses might not be such certain stock slam dunks.
Stocks like Apple and Amazon feel like “safe bets” to investors because they’re constantly in the news, they’ve posted incredible long-term returns and most consumers use and enjoy their products. But that level of complacency can lead to costly mistakes.
Here are some things to consider before adding big-name stocks to your portfolio.
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Great Companies Are Not Always Great Investments
Apple and Amazon are clearly successful companies, as evidenced by their long track records of innovation and outperformance. But this doesn’t automatically make them good stock buys. Positive sentiment can help push stock prices higher. However, as pointed out by research firms like Vanguard, valuation and earnings growth are also big factors in terms of future returns.
If stocks have run up to all-time highs, returns going forward may be limited, even if the companies continue to perform.
Portfolios Can Get Overconcentrated
One of the cornerstones of portfolio construction is diversification, as pointed out by the U.S. Securities and Exchange Commission. Unfortunately, if your idea of diversification is owning a bunch of big-name tech stocks like Google, Meta, Apple and Microsoft, you won’t be very diversified at all. In fact, your portfolio will be quite concentrated in a single area: large-cap tech stocks.
When all of the stocks you own are big companies in the same industry group, they tend to trade in tandem. Factors like interest rates, consumer demand and tech sentiment all have the same effect on these stocks, more or less. If your portfolio is truly diversified, it can smooth out the ups and downs of your account and lower your overall risk.
Past Performance Doesn’t Guarantee Future Results
When stocks like Nvidia post big returns, it’s only natural to feel as if those gains will continue forever. But Russell Investments disclaims financial projections in the classic refrain: “Past performance is no guarantee of future results.”
Amazon, for example, owed the bulk of its tremendous growth to its transformation from an internet bookseller to a logistics machine that’s now the largest online retailer in the world. While it still has a growth story attached to it, in the form of cloud computing, AI and other technologies, not all companies are successful at managing change. In fact, academic research from Schroders and others shows that past winners don’t always repeat at the same pace.
Expectations Are High
Companies that have performed well in the past are expected to continue to do so in the future. These sky-high expectations can limit future returns. It’s how much future earnings growth is already baked into expectations. If a stock is expected to grow earnings by 50% and it “only” earns 40% more than the prior year, investors will be disappointed, even with that astounding rate.
For stocks that have performed well in the past, like Apple and Amazon, those expectations may be even higher. This doesn’t mean investors shouldn’t own them, it just means they should be aware of how high the bar may be.
The Bottom Line
Before you buy any stock, not just the big-name ones, be sure you have a strategy. Understand the valuations and future earnings expectations of any stocks you buy and don’t let emotion enter the equation. While brand recognition can help draw investors to a stock, it can only go so far when expectations for future performance are high.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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