Recent research has revealed a compelling reason to buy and hold an index fund: only a small group of stocks has provided the long-term gains of the global market. If you do not own these stocks, your net long-term gain will be zero or possibly even worse.
The study, “Long-Term Shareholder Returns: Evidence from 64,000 Global Stocks” was published in the Financial Analysts Journal and was conducted by academics from Arizona State University, Hong Kong Polytechnic University, and Tulane University. The researchers analysed almost 64,000 publicly traded stocks globally between 1990 and 2020, uncovering that just 1,526 securities, which accounts for 2.39% of the total, produced all the wealth that the global equity market generated over 30 years. The net wealth creation of the remaining 97.61% of stocks was zero.
Even within the 2.39% group, the distribution of returns was very uneven. Just five stocks outperformed the other 64,000 and contributed to over 10% of the total net wealth creation: Apple AAPL, Microsoft MSFT, Amazon.com AMZN, Alphabet GOOGL and Tencent Holdings TCEHY.
The top 0.25% of all stocks were responsible for nearly 50% of the total net wealth created over these 30 years, which is vastly different from the bell-curve distribution theory typically taught in statistics. In fact, in this study, the modal buy-and-hold return for a stock was almost a complete loss. This suggests that if a stock is chosen at random and held over the long term, the most probable outcome would be a significant loss.
Many short-term investors may not be aware of the skewed distribution of stocks because it is only largely absent at intervals of several weeks or months. Financial planners that rely on mean returns and the median of the distribution of possible future outcomes for their clients should also consider the skewed distribution of stocks, as it is quite likely that most individual outcomes will be below the mean.
These findings have led to a suggestion that investing in an index fund benchmarked to a global stock index is the safest bet, with Japanese stocks being among the best performers.
There is no guarantee that US stocks will be heavily represented in the tiny slice of the market that will produce all of the stock market’s future net wealth creation. It is true that, over the past 30 years, US stocks did dominate that tiny subset. However, there is no guarantee that the US stock market won’t suffer the same fate as that of Japan’s in the coming decades.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at email@example.com