Key Lessons from 100 Years of Equity Investing
Hendrik Bessembinder, a prominent researcher in financial markets, has shared valuable insights in his recent paper titled “One Hundred Years in the U.S. Stock Markets.” Here are some essential takeaways for equity investors:
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Market Returns vs. Individual Stocks: Over the past century, the cap-weighted U.S. stock market has delivered a compounded annual return of about 10.1%. This significantly outpaces the 3.3% return from U.S. Treasury bills. Remarkably, over $90 trillion in shareholder wealth has been generated through U.S. equities, even though the median stock had a cumulative buy-and-hold return of -6.9%. Nearly 60% of stocks performed worse than Treasury bills.
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The Impact of Skewed Returns: A small number of exceptional companies have driven the bulk of market gains. Just 46 companies accounted for half of the total $90 trillion in net wealth creation, while only 1,082 stocks (approximately 3.7% of analyzed stocks) were responsible for all net wealth increase. The implication is clear: broad market ownership through index funds or ETFs is more advantageous than selecting individual stocks.
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Diversification Matters: Effective diversification is crucial. It not only reduces volatility but ensures exposure to those few companies that significantly boost overall equity returns. An investment strategy focused solely on avoiding losers is insufficient; investors need to hold shares in potential winners.
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The Importance of Time in the Market: Stocks with the highest cumulative returns over time had long listing periods, averaging over 93 years. This highlights the power of compounding and suggests that investors should avoid excessive trading, which can disrupt wealth accumulation.
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Broader Asset Allocation: While Bessembinder’s study focuses on equities, it’s essential for investors to consider diversification across various asset classes, including fixed income, real estate, and alternatives. Creating a well-rounded portfolio requires a broader strategy beyond just equities.
For further reading, access Bessembinder’s complete paper here.
Artie Green is the founder of Cognizant Wealth Advisors, a registered investment advisor. For more information, visit cognizantwealth.com.
