FANMAG
FANMAG is the acronym of Facebook, Apple, Netflix, Microsoft, Amazon, and Google. The six companies have experienced massive growth for the past ten years, and they have been retained as the top five companies. The portfolio is diversified, and this brings about advantages and disadvantages.
The portfolio of FANMAG is diversified, making the risk of investing to below, and it also reduces the potential of capital gains. The more the portfolio is diversified, the more the performance in the market. The advantage of concentrating on a few diversified stocks is that it reduces the overall level of potential risk. The individual investment portfolio is diversified to minimize the inherent risk of owning only one stock from a single industry. The other advantage is that it helps reduce volatility levels. Investing in a few stocks will help the investor lose a lot of stocks just in case other investors diversify investments into foreign stocks in countries facing economic challenges. Investing in diversified stocks increases the quality of the companies. Most of the companies are highly-priced, and this increases the margin of safety.
Investing in a few stocks can be time-consuming and too complicated. Many investors may invest a lot of assets they barely understand and what is contained in them. The outcome of the investment may be negative. Investing in a few stocks may lack attention in a personal portfolio. The company managing portfolios may not pay much attention to a portfolio with few stocks, which will result in a loss for the time wasted. Investing will result in market risk. Market risk arises when one is not knowledgeable of how portfolio volatility will reduce the portfolio’s performance.
Unsystematic risk is mitigated through diversification and is well associated with the company’s stock. The risk includes bad entrepreneurship, political and legal risks. I will make my friend aware of a chance that may arise due to a wrong entrepreneurial decision. FANMAG companies are technology-related companies, and in this case, Apple Company might decide to perform market research and conclude that consumers want bigger Apple products. The production kicks off and brings about bigger products. By the time the product reaches the consumer, they reject, and they want the standard size of Apple products. The option is that the products go unsold or lower the prices, which will automatically lead to huge losses. The bad economic decision will affect the stock price negatively.
The political and legal risk will arise if the government comes up with a decision to subsidize one company in FANMAG. In this case, Apple and its competitors. If the state government subsidizes the competitor and prohibits some Apple operations, the stocks of apple will fall, and the stocks of the competitors will rise. This political and legal risk will affect the Apple stock negatively.
The friend should consider investing his inheritance in FANMAG because the companies investing have an excellent performing portfolio. Even though the risks involved, the companies have earned global recognition. The companies have diversified risk that neutralizes any loss that might occur.
Conclusion
In conclusion, companies that have diversified their stake have higher chances of growth than those companies that are not diversified. The diversification reduces the level of volatility and the potential risk. The investors must acquire tremendous knowledge before investing in any company simply because it is complicated, and they may support a lot of assets in their portfolio, which in return could lead to the loss. The higher the risk, the more the returns, which should be the underlying factor for every investor.
References
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