Because of the fact that a handful of stocks earn very high returns, most stocks earn returns that are below the average return of the overall stock market. This is not news. (For instance, I wrote a couple of articles about the concept back in early 2009, and it wasn’t a remotely new observation even then.)
A recent study by Hendrik Bessembinder of Arizona State University, however, shows that not only do most stocks earn less than the market’s average return, most stocks even underperform 1-month Treasury bills over the course of their existence. Specifically, Bessembinder looked at the Center for Research in Security Prices (CRSP) database and found that, over the course of their respective lifetimes in the database, 58% of stocks had lower returns than 1-month Treasury bills.
In other words, most stocks are not only risky, they also have pretty poor returns. As Bessembinder puts it, “The fact that the broad stock market does outperform Treasuries over longer time periods is fully attributable to […] the relatively few stocks that generate large returns, not to the performance of typical stocks.”
Personally, I see this as an argument in favor of using index funds to make sure I don’t miss out on the handful of good stocks. Of course, the counterpoint is that if you allocate your entire portfolio to just a few stocks and one of them does happen to be one of those superstar performers, you’re in for a heck of a ride. Still, I’d rather not risk having an “all the risk of stocks, all the return of Treasury bills” outcome.
- Do Stocks Outperform Treasury Bills? from Hendrik Bessembinder
- Lopsided Stocks and the Math Behind Active Management Futility from Oliver Renick (an article related to the above study, written in more accessible language)
- 4 Ways to Manage Sequence of Returns Risk in Retirement from Wade Pfau
- What to Do with a Lump Sum in Retirement? from Darrow Kirkpatrick
Thanks for reading!