Tech stocks driving the markets higher in 2019

2019 was a particularly spectacular year for tech stocks. Leading the way was Apple, with a gain of over 80 per cent – an astonishing return, given it was already one of the most valuable companies in the world.

In the US, the tech sector gained 47 per cent and accounted for almost a third of the S&P 500's total return. This dominance is not new. The so-called FAMANGs – Facebook, Apple, Microsoft, Amazon, Netflix and Google – accounted for 6 per cent of the S&P 500 in 2010, notes Albert Bridge Capital's Drew Dickson, compared to 17 per cent today. The six companies accounted for a large slice of the S&P 500's total returns over the last 10 years.

Does that mean indices are dangerously dependent on a small number of tech companies? Not necessarily – as Dickson points out, many of the other 494 companies in the S&P 500 might have enjoyed much better returns if their business models hadn’t been disrupted by the FAMANGs. In any event, investors should know it’s normal for a small number of companies to account for a big portion of investment returns. The S&P 500 posted annual gains of 7.3 per cent between 1994 and 2016, but data from Dimensional Fund Advisors shows that fell to just 2.9 per cent if you missed the top 10 per cent of performers each year.

The FAMANG's performance is merely further proof that the late index fund giant John Bogle was right when he advised investors to forget stockpicking and looking for the needle in the haystack – just buy the haystack.