Many market commentaries have covered the concentration of equity market returns in a very small number of stocks. A recent paper by Arizona State University Professor Hendrik Bessembinder looks at 100 years of U.S. stock returns and his data shows that the narrowness of equity market wealth creation may be even more concentrated than is widely realized and the concentration of returns has meaningfully increased in recent years.
Notable observations from Bessembinder’s analysis:
•U.S. Equity investing has been very lucrative, generating $91 trillion in wealth over the last 100 years.
•However, more stocks have negative total returns than positive returns and only 41 percent of stocks have outperformed T-Bills.
•Gains have become more concentrated. It only took 13 stocks to generate half of the $48 trillion in market gains over the last 9 years, compared to 89 stocks over the prior 91 years (1926–2016)
The implication for investors is a reminder to cast a wide, diversified net across the equity market. The paper also underscores that return compounding has been the key to equity wealth generation. Broad index exposure is one way to capture market breadth and compounding simultaneously.