“Stocks go up over time.”
You’ve heard it. You’ve probably said it. It’s one of those phrases that feels obviously true. Except…it’s not. At least not in the way most people think.
The collection of businesses that make up the stock market does appreciate in value over time. The individual businesses? That’s a completely different story.
Hendrik Bessembinder looked at nearly 30,000 U.S. stocks over the past 100 years and found something that should make every investor pause: the median stock return is negative, and nearly 60% of stocks destroyed wealth relative to Treasury bills. Let that sink in. Sixty percent of the time, if you bought a random stock, you would have been better off buying Treasury bills. Most stocks are bad investments over a long enough period. Most stocks lose money. The data is what it is.
So how does the market keep going up? A small number of companies do an absurd amount of the heavy lifting. Apple, Microsoft, Nvidia, Amazon: these aren’t just success stories, they create the outcome. A handful of winners drive the majority of returns. In fact, just 46 companies account for half of all wealth creation over the past 100 years.
Grasping Market Function
This is incredibly counterintuitive because in most areas of life, outcomes tend to cluster around the average. Most restaurants are fine. Most careers land somewhere in the middle. Most houses appreciate roughly in line with their local market. But stocks behave differently. They look much more like book sales. Most books sell very few copies, while a handful—Harry Potter and the like—sell millions and carry the entire industry. The stock market is no different.
Financial media, of course, spends an inordinate amount of time trying to identify those winners. And it makes sense: getting it right can be life-changing. “Coming up next…can’t-miss ideas in today’s market!” But the real question is how often investors actually get it right. Under the guise of “stocks go up,” there’s a quiet encouragement of stock picking, concentration, and performance chasing, all under the assumption that time will bail us out. But time doesn’t fix a bad investment. Time magnifies a bad approach.
Getting Paid for Risk
This leads to one of my biggest investing pet peeves. When I bring up diversification, the most common response I hear is, “So you want us to take less risk?” No. Diversification isn’t about lowering returns—it’s about increasing them. If you are extremely concentrated, chances are you’re taking on a massive amount of uncompensated risk.
Of course, the pushback is always the same. People point to their big winners. Nvidia. Amazon. Apple. See? This works. But that’s like putting 50,000 people in a stadium, flipping coins, and asking the one person who got 10 heads in a row how they did it. “I just had a great feeling about this coin.”
Yes, the stock market goes up over time. But most stocks don’t.
Concentration makes those winners feel obvious in hindsight. It creates a powerful illusion that success was predictable, even repeatable.
Diversification isn’t settling, it’s acknowledging reality. It’s how you avoid the seductive trap of owning the winners, which for most just means chasing them after the fact.
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CONSIDER
Connection and execution:
“I thought hard about what other people are trying to accomplish. And I tried to shape my language in a way which they could hear it. It doesn’t matter what you say, it matters what they hear and how they feel.” – Sam Heinke
“A well-executed, suboptimal strategy will generally beat the best strategy, poorly executed.” – Daryl Morey
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Let’s get after it this week!
Brooks
Brooks Palmer, CFP® is Head of Investments at Root where he helps identify, evaluate, and implement investment solutions tailored to clients’ needs. In Full-Court Press, he breaks down what’s happening in the markets—cutting through the noise and jargon—while connecting it to Root’s core investment tenets so you can make the most of your money and your life!
The examples provided are hypothetical and for illustrative purposes only. Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results. The information presented should not be construed as investment advice or a recommendation to buy or sell any security or implement a particular strategy.
Advisory services are offered through Root Financial Partners, LLC, an SEC registered investment adviser.