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Most stocks underperform over the long-term

September 28, 2020

Monday, September 28th, 2020

“Most stocks underperform over the long-term”

It is no secret that a small number of companies are propping up the stock market this year, masking the impact the coronavirus has had on the U.S. economy. The other side of the market’s overall resilience is how poorly the average S&P 500 company has done versus the index itself.

Michael Batnick points out in his recent Irrelevant Investor blog post1 that 66% of S&P 500 stocks have underperformed the S&P 500 over the last year, while 76% had a deeper drawdown (peek-to-trough fall) during the first quarter selloff. So, on average, most stocks have generated less return with more risk.



The reason that math on market averages works is because the mega-cap tech companies make up a large percentage of the small group of stocks that have performed the best. In other words, the strength of the whales gets more weight than the weakness of the minnows. 

Although the S&P 500 fell nearly 35% in March, the average stock fell more than 40% and nearly 1/3 of companies fell 50% or more. Many of those stocks have since rallied off their lows, but the majority have yet to hit new all-time highs like the mega-cap tech companies, the NASDAQ Composite or even the S&P 500.


It is the price of omission that may be causing some of the most pain for stock pickers this year, especially those who are sticklers to finding value. Unfortunately, the cheap have remained cheap or gotten cheaper, while the more expensive names have become even pricier. This is likely why we are seeing such wide dispersion in active manager performance in 2020.

The concentration in market gains is not just a 2020 phenomenon, even if it is more pronounced this year. One study conducted by the Journal of Financial Economics concluded that the entire net gain of the US stock market between 1926 and 2016 could be attributed to only 4% of listed companies (out of 26,000)2.

Stocks are highly correlated in the short run, but over the long-term, a smaller and smaller group of names make up the majority of the market’s gains. And that trend is not just U.S.-centric, it also holds for the global market. Over the last ten years, only 30% of stocks outperformed the MSCI World index (as of 12/31/19). 


So, if you own a portfolio of individual stocks, you should expect quite a few of them to underperform. And it is often not what you own, but what you don’t own that can cost you the most.

Most importantly, by adequately diversifying your equity portfolio, you have a better chance of obtaining at least some exposure to the companies that will make up the lion’s share of future market gains.


Jack Holmes, CFA®

WealthPlan Partners




The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which Investment(s) may be appropriate for you, consult your financial advisor prior to investing.  Information is based on sources believed to be reliable, however, their accuracy or completeness cannot be guaranteed. Statements of forecast and trends are for informational purposes and are not guaranteed to occur in the future.

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