We all know the saying “Don’t put all your eggs in one basket.” This idea is especially relevant when it comes to designing and implementing retirement portfolios. Why? Well, let’s look at the historical returns of individual stocks.

Most Stocks Are Losers!
According to research done by Hendrick Bessembinder, 57% of the 26,168 publicly traded US stocks that have existed between 1926-2019 lost shareholder value when compared to T-bills. This means that if an investor was to select one stock during this period, they were more likely than not to lose money when compared to a cash equivalent! This is remarkable given the fact that from 1926-2019 the S&P 500 gained approximately 877,534.01% or 10.14% per year. [1]

The Top 4% Create the Majority of Wealth
How is it possible to have the S&P 500 gain so much in value, while also having 57% of all publicly traded stocks lose value over the same period? The short answer is diversification. The study goes on to find that the majority of wealth creation is done by just the top 4% of stocks, and because the S&P 500 offers modest diversification benefits (500 stocks), it ensures that the returns from some of the extreme winners are captured.[2] In fact, between 1991 and 2015 the average return of all the stocks in the S&P 500 beat out 70% of individual stock returns in the index due to the extreme gains of the best stocks.[3] These findings lead the authors of ‘Fooled Conviction’ to conclude, “portfolios with fewer stocks are more likely to underperform than portfolios with more stocks, because larger portfolios are more likely to include some of the relatively small number of stocks that elevate the average return.”

This research provides a foundation as to why our portfolios have thousands of investments across the world. If 4% of stocks going forward drive a majority of the stock market returns, then we want to capture those extreme winners where they happen. So in the end, the saying don’t put all your eggs in one basket really does make a lot of sense.

[2] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3537838
[3] https://www.spglobal.com/spdji/en/documents/research/research-fooled-by-conviction.pdf
Past performance is not a guarantee of future results