Stock Market Secrets: Is Bigger Always Better?

With the stock market soaring this summer, you likely read a lot about a number of mega-cap companies: the largest companies in the investment universe as measured by market capitalization. But when it comes to investing, bigger may not always be better.

While the exact thresholds change with market conditions, mega-cap companies generally have market capitalizations above $200 billion. The so-called FAAMG stocks (Facebook, Apple, Amazon, Microsoft, and Google) are good examples, but there are many others.

The total number of mega-cap stocks varies with market conditions, but there are generally 25 to 30 in the United States. Bank of America, Berkshire Hathaway, The Walt Disney CO., and Johnson & Johnson have also made the list. The massive value of these companies can attract investors who think the businesses are too big to fail. Mega-cap companies tend to have recognizable brands as well as steady revenue, earnings, and dividend streams. These qualities appeal to investors who are seeking less volatility than smaller stocks generally offer.

But are mega-caps necessarily good investments because of their size? To answer that question, you may have to look deeper.

While each of the FAAMG companies was initially a single business, for example, they are now much more.

Amazon began as an online retailer of books, but is now in the business of cloud-based web hosting and even owns brick-and-mortar grocery stores. Google started as an internet search engine, but now has a mobile phone operating system and even a self-driving car enterprise.

Diversification in a business model is good, but it can present challenges. No company can succeed at everything. So, it takes an experienced analyst to determine if size is good or bad.

The moral of the story: Bigger may or may not be better. When analyzing mega-cap stocks like these, an investor should look beyond size and consider many other factors.

We can help you navigate these factors to determine what investments are best for your current and future financial goals.

Four Questions to Ask Any Financial Advisor

Are you looking for referrals for the right financial planner? Are you wondering which financial adviser will meet your needs? To determine if a financial advisor is right for you, use the following four-step process.

1. Check your advisor’s background. Make sure you check the background of your advisor using BrokerCheck, a free service provided by the Financial Industry Regulatory Authority. The service is private (your advisor won’t know you checked), and any violation you find is worth thinking about. Depending on the results of this search, you may want to find another financial advisor.

2. Ask what he or she charges (and how). Ask what your advisor charges, and how the fee is structured (a fee based on assets under management, commission, etc.). Your advisor will not be offended. In fact, he or she likely expects this question and is used to discussing it.

3. Find out what services you will be receiving. Once you understand what you are paying and how the fee is charged, it’s time to find out what you’re buying. In addition to providing continual portfolio monitoring services, your financial advisor may conduct in-person reviews with clients each year.

4. Get references. Ask the advisor for professional references. Established professionals can point you to others who have used their services and can provide feedback on their experience. A personal referral is worth a lot.

Have questions about our services? I’d be happy to review our offerings, provide answers, and discuss your options. Just give me a call.