What would you say if I told you that, on average, the majority of stocks lose money over time? Would you call me crazy? After all, we all know that the stock market has done nothing but increase over the long term. Right? Well…
According to an interesting piece in the latest Money Magazine by William J. Bernstein (author of The Four Pillars of Investing), it’s not that simple. In fact, looking at the past 30 years, “the top-performing 25% of stocks were responsible for all the gains in the broad market.” The remaining 75%, on the other hand, “collectively generated annual losses of around 2%.”
If stock market’s long-term gains have been produced by a relatively small proportion of stocks, why not just invest in these “superstocks” and ignore the rest? The problem here lies in accurately identifying the superstocks. Make a few mistakes and you’ll dramatically underperform the market.
As Bernstein puts it:
“Remember that the point of investing isn’t to aim for the highest possible returns. It’s to make sure you don’t die poor. Yet trying to optimize your performance by seeking out the needles in the haystack is a sure way of becoming, well, poor.”
The solution? Diversify your equity investments as broadly as you can. Perhaps the easiest way of doing this is to buy total market index funds that cover both domestic and foreign stocks.