Historical data says to stay away from FAANG stocks in the next decade

Think FAANG stocks are forever? Think again. The strong track record of FAANG stocks — Facebook, Apple, Amazon, Netflix and Google — made them go-to investments for investors seeking consistent growth. For the past 5 years, these stocks averaged annualized returns of 41.6% — easily outperforming the S&P 500’s 15.8% per year.

But today’s giants could be tomorrow’s dinosaurs. According to Ruchir Sharma, there’s no guarantee they’ll stay on top. The larger they become:

• The harder they fall: Data shows top companies of one decade have less than a 20% chance of staying at the top by the end of the next.
• The harder they’re regulated: Each of the FAANG stocks (except Netflix) are going through regulatory scrutiny for their dominance in their industries.

Only downhill from here: In the decade after a company reaches the top 10, we see two things play out on average:

• Growth falls from 16% to 4%.
• Stock returns turn negative.

Their massive scale eventually becomes a roadblock to their growth. But there’s one exception: Microsoft, the only company to remain in the top 10 for 3 decades.

Looking forward: We’ve written extensively about the companies that can become the leaders of tomorrow. But in the end, it’s difficult to tell which will reach the top in 10 years.

• Both Amazon and Netflix’s stocks crashed more than 50% several times as a public company.
• Facebook crashed more than 50% in its first 6 months after going public.

But we can rely on data  — and it tells us, these stocks are unlikely to stay tomorrow’s drivers of return.