Tech Stocks have soared. Be careful before deciding they're the only investments worth owning.
The past decade -- and especially the past 12 months -- has witnessed a remarkable investing trend. The stock prices of large US technology companies and a handful of other "growth" companies have soared. Everything else has lagged by a wide margin.
The question: are we living in a brave new world ... or is this just another bubble?
At Old Peak, we rely on academic research for clarity. Two charts tell the story. The first compares the performance over the past 12 months and 10 years of two mutual funds: VIGAX, in blue, which owns every large US growth stock (about 275), and DGEIX, in orange, which owns every stock in the world (about 12,000).
Large US growth stocks beat the world by 25 percentage points the past 12 months, and by 6 percentage points, annually, for the past decade. That's a massive gap.
So, is investing nothing more than buying a few tech stocks and enjoying the ride ... and ignoring the other 12,000 stocks around the world?
Before you make that decision, look at one more graph, below.
The chart, prepared by Dimensional Fund Advisors, compares two types of stocks: growth stocks (lighter blue) and the opposite, "value" stocks (darker blue). The chart tracks the price of each category of stock relative to their book, or accounting, value. The data is for the last 100 years.
Growth stocks have always been more expensive. Investors pay more, because they believe these stocks will grow faster. No surprise there. What is pretty shocking to me: how much greater a premium investors will pay today compared to the last 100 years. On average, over the last century, investors have paid about 3 times more for a growth stock than a value stock. Today, they will pay about 8 times more.
There are two possibilities: we are living in a new world or this is a bubble. I believe it's closer to the latter, but no one can be sure. History tells us this much: frequently, when the price of an investment has gone up a lot over the past decade, the next decade is a disappointment.
So if your strategy is to ride tech stocks ever higher, be prepared. Things may get bumpier.
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