Should I hold 30, 300, or 3,000 stocks?
Key Takeaways
2.39% of firms are responsible for all net global wealth creation in the stock market.
This means that only 3 out of 100 companies give you positive returns from the stock market. The remaining 97% give you lower returns than cash over the long-term.
You’re better off investing broadly across every market, sector, industry, and country. From there, there are tilts that can be applied to boost returns based on data and research.
You have heard of the common adage, “Don’t put all your eggs in one basket”. Those who didn’t heed this saying and invested heavily in single sectors or a handful of companies would have had a turbulent time in 2022.
In our article Needle in a Haystack, we explored the evidence from a peer-reviewed study in the Journal of Financial Economics and its implications for investors. The research quoted in the article was recently updated and in its latest iteration, researchers found that a mere 2.39% of firms accounted for all net global wealth creation in the stock market.
In simpler terms, only 3 out of 100 companies give you positive returns from the stock market. The remainder — 97 out of 100, give you lower returns than cash over the long-term. This is perfectly logical and you can look to local companies as examples. If you held stocks listed on our local exchange, it is likely you have a few delisted stocks still residing in your custodian account. Examples like Midas, Swiber, Ezra, Ezion, Noble, Hyflux, and Pacific Andes just to name a few. And what about investors who bought our local airline SIA in its heydays? Its likely you are still sitting on a -50% paper loss.
So unless your stock picking skills or luck is exceptional, then you would be better off not banking on the off-chance you manage to attain the magical but elusive 3%. Traditional investing is all about hyping up investors to try to find the proverbial needle in the haystack — that multi-bagger, that one stock representing returns many times your capital. The problem with running a concentrated investment of “best ideas” is that:
You have a higher probability (57.7%) of buying stocks that have negative returns
You have a low probability (2.39%) of picking a stock that will deliver massive returns for you
To ensure that we do not miss out on the small percentage of stocks that drive all of wealth creation, we employ broad diversification, which means we allocate to every market, sector, industry, and country to capture returns wherever they show up. This form of extreme diversification also ensures that your portfolio will not “blow up” in times of stress or economic crisis.
This is why we are invested globally in 49 countries across more than 12,000 securities (a typical global mutual fund holds about 80 securities, and global ETFs about 2,300 securities).
In the chart above, the orange line shows the growth of $1 for the global developed market index starting from 1975. It has done pretty well, multiplying the original investment by fifty times, $1 to $50.
The blended global index over the same period produced almost double the terminal wealth, $1 to $99. The allocation to drivers of returns that we wrote previously about here, helped drive the outperformance against the market index. We know that the effects of higher returns are pervasive and persistent through time, giving us the confidence to continually allocate to them.
Who says you can’t have your cake and eat it? Higher returns with less risk of permanent capital impairment?
Yes, please.
In the same way that you would not attempt a high risk activity such as sky-diving without professional supervision, investors can benefit greatly by relying on an adviser — having the peace of mind knowing that their plan is in the hands of a professional.
If any of the points speak to you and you would like to have a exploratory discussion, click here to schedule a chat with us. (Our 30-minutes exploratory meeting is complimentary - either Zoom or In-Person)