Needle In A Haystack

According to Hendrik Bessembinder, a finance professor at Arizona State University, in his paper, "Do Stocks Outperform Treasury Bills?", over the period from 1926 to 2016, a randomly selecting individual stock outperformed the value-weighted market, essentially a market index, four percent of the time. In fact, more than half of common stocks deliver negative lifetime returns. Finding a great stocks is like finding a needle in a haystack. The odds are stacked against you.

How does the overall stock market yield such a higher return than the typical individual stock? It is because enormously high returns from a few individual stocks offset the modest or negative returns of the typical stock. For example, of the 25,300 stocks in the Center for Research in Securities Prices (CRSP) common stock database from 1926, just 1,092 stocks accounted for all of the roughly $35 trillion dollars in wealth creation. Basically, around 4% of the stocks created all of the accumulated wealth. In order to outperform a market index as an individual investor you will need to identify and invest in the 1 in approximately 25 stocks responsible for this wealth creation.

It is extremely difficult to outperform the market over the long term. In fact, nearly 80% of mutual funds underperformed the S&P500 from August 2007 through August 2017. Additionally, hedge funds have underperformed the S&P500 by 51% since March 2009.

ProFolio uses ultra low cost index funds in our portfolios with an average expense ratio of 0.17%.

1) https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2900447

2) https://www.financial-planning.com/news/majority-of-mutual-funds-underperformed-over-10-years-news-scan

3) https://www.ft.com/content/9bd1150e-1b76-11e6-b286-cddde55ca122

 

Disclosure:

The information presented here is the opinion of the author and may quickly become outdated and is subject to change without notice. All material presented in this article are compiled from sources believed to be reliable, however accuracy cannot be guaranteed. No person should make an investment decision in reliance on the information presented here.

The information presented here is distributed for education purposes only and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or participate in any particular trading strategy.

Performance data showing past performance results is no guarantee of future returns.

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