Stocks vs. Indexes
This article was originally published in our weekly newsletter.
You’ve probably heard me say “The markets have recovered 100% of the time.”
It is intended to help you not panic whenever the markets crash next.
I’ve noticed many people today are starting to focus their portfolios on stocks.
Individual stocks don’t have as good a recovery rate.
Here’s what Morgan Stanley found:
Here’s what the above graph means:
About 54% of stocks never recover.
Those who do recover often take years to regain their previous level.
That may seem shocking until you realize that around 60% of US companies fail to grow faster than US Treasury Bills.
Only around 2% of companies account for the majority of the growth in the market.
The Takeaway
Broad diversification doesn’t make sense when you realize how few stocks contribute to growth.
Stock picking is risky if you are not diligent in monitoring your positions.
Diversify with thoughtfulness, not general ambiguity (buy a little of everything).
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