Tuesday Tidbit: Market Myth: Most Stocks Go Up over Time

We already cracked the myth here that stocks rarely, in fact, return anything close to 10% per year, except over the long run. The long-term average return for stocks has a tendency to lead us to believe that most stocks go up over time. Sadly, in fact, they do not.

Our friends at J.P. Morgan conducted fascinating research on stocks in the Russell 3000 index from 1980-2020. The Russell 3000 index is intended to be a benchmark for the entire U.S. stock market. When looking at the index over 40 years, here’s what they found.

Down and Out — 44% of all stocks that were ever in the Russell 3000 index from 1980-2020 experienced a “catastrophic” loss, defined as a 70% decline in price from peak levels which was not recovered. More than 40% of companies over 40 years lost more than 2/3 of their value that was never recovered.1

Maybe Cash Is King — 42% of all stocks in the Russell 3000 experienced NEGATIVE total returns over the 40-year timeframe from 1980-2020. That is, investors would have been better off holding cash for 4 decades rather than 40% of the entire index. Let this sink in — two out of every five stocks in the index over 40 years lost money on average every year.

Lots of Dead Trees but a Blossoming Forest — The Russell 3000 index had an average annualized return of 11.85% from 1980-2020, so the exorbitant number of losing stocks cannot be attributed to a bad decade . . . or four. 40+% of all stocks lost money during a period that saw above-average long-term market returns.

What’s a Better Idea — Stock-picking or Blackjack? — 1 out of every 3 stocks in the Russell 3000 index outperformed the index itself over 40 years. Meanwhile, blackjack players have a 42% chance of beating the house on a given hand.

Hitting It Big — Only 1 out of every 10 stocks was a “megawinner” defined as having a return of 500+% compared to the Russell 3000.

If this data surprised you when you first read it, join the club. It’s eye-opening. Here are three takeaways:

  1. Diversification is the name of the game. A very small number of stocks do the majority of heavy lifting for the stock market. Knowing those stocks in advance is like trying to pick a needle in a haystack. We believe the better alternative is selectively buying the entire haystack.
  2. Owning a large position in a single stock is stacking the odds of success against you, no matter how much you love owning the stock (or working for the company). See takeaway #1.
  3. Individual stock picking is more risky than it seems. If you’re going to pick individual stocks, make sure it’s a small portion of your portfolio…or part of your “cheat day” portfolio. More on this topic next week.

Weekly Tidbit Quote: “The desire to perform all the time is usually a barrier to performing over time.” — Robert Olstein

If you have a question or a topic you’d like to learn about in a future Tidbit, please reply to this email. If you like the Tuesday Tidbit, feel free to share it with a friend!

John Fischer, CFA®, CFP® | Chief Investment Officer
Mosaic Family Wealth
john@mosaicwealth.com | MosaicWealth.com

1 Source: https://assets.jpmprivatebank.com/content/dam/jpm-wm-aem/global/pb/en/insights/eye-on-the-market/agony-ecstasy-2021.pdf

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