A handful of stocks is responsible for virtually all the gains in the stock market since 1926. The rest…
Most stocks lose money. How can that be? As almost all investors know, large-company stocks have returned, on average, an annualized 10.1% since 1926. But a fascinating new academic paper finds that virtually all of those profits can be attributed to fewer than 4% of all stocks.
Authored by Hendrik Bessembinder, a finance professor at Arizona State University, the paper (Do Stocks Outperform Treasury Bills?) holds an important lesson for investors — namely that if you want to make money in the stock market, you’d better either be close to psychic in your ability to pick stocks or you’ll need to own lots of them. And the best way to accomplish owning lots of stocks is by investing in index funds. (There should be an asterisk affixed to Bessembinder’s study, however, which we’ll get to in a minute.)
Bessembinder examined the returns of the 26,000 stocks in the Center for Research in Security Prices database, which contains all common stocks listed on major U.S. exchanges. He found that the average stock traded for just seven years and lost money (including reinvested dividends). In fact, the most common return for an individual stock over its lifetime was a loss of 100%. In other words, if you had invested in any one stock from 1926 through 2015, you would most likely have come away poorer. Only 48% of stocks delivered any gains.