Individual Stock Risk: What the Research Shows

Here’s a stat that stops a lot of people in their tracks:

Less than 4% of all U.S. stocks have been responsible for the market’s net gains going back nearly 100 years.¹

That’s from a landmark study by Professor Hendrik Bessembinder of Arizona State University, titled Do Stocks Outperform Treasury Bills?¹

When it was first published in 2018, it made waves. And now, newly updated data through the end of 2024 confirms what the original research showed:

A small handful of companies are responsible for almost all the market’s wealth creation.²

To put it in perspective, picking one of the long-term winners at random is a bit like rolling a 25-sided die and hoping to land on a single number.

Even more eye-opening? Just one-third of one percent of stocks created half of all the market’s lifetime gains. We’re talking about names like Apple, Microsoft, and Nvidia.²

Apple alone has delivered nearly $4.7 trillion in shareholder wealth. That’s almost 6% of all the wealth generated by the entire U.S. stock market since 1926.²

The top five stocks together? Over 21% of lifetime market wealth.²

The rest of the market? Most stocks either underperformed safe government bonds or lost value altogether.²

This happens, Bessembinder believes, because most companies struggle to grow or maintain market share. A few, on the other hand, create breakthrough products, dominate industries, or ride powerful long-term trends. Those outliers deliver gains so large, they carry the whole market.

That’s why stock returns aren’t distributed evenly. They’re lopsided. A small number of big winners end up covering for thousands of smaller or failing companies.

So what does this mean for investors?

To be clear, Bessembinder’s study is based on historical data. It’s always worth emphasizing that past results do not guarantee future returns.

Additionally, the study also doesn’t say investors should avoid the stock market. Quite the opposite.

Historically, equities have represented one of the most powerful ways to build long-term wealth.

But the catch is this: most of those returns come from a very small number of companies, and it’s nearly impossible to know in advance which ones will be the standouts.

Even professional investors, with research teams and advanced tools, rarely get it right year after year.

For individual investors, chasing the next Amazon might feel exciting. But statistically, it’s much more likely to end in frustration.

So instead of trying to guess which stocks will succeed, the study points to broad market exposure as a more reliable approach for capturing long-term gains.

With a diversified portfolio, you don’t have to find the needles. You already own the haystack!

That’s the beauty of broad market investing. You automatically capture the rare winners without needing to predict them.

Sources:

1. Journal of Financial Economics, 2018 [URL: https://www.sciencedirect.com/science/article/abs/pii/S0304405X18301521?via%3Dihu]
2. W. P. Carey School of Business, 2024 [URL: https://wpcarey.asu.edu/department-finance/faculty-research/do-stocks-outperform-treasury-bills#:~:text=Dec.%2031%2C%202022-,Updated%20spreadsheet,-%E2%80%94%20U.S.%20public]

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• Monthly Market Update: Stocks Rally as Market Leadership Shifts in Early 2025

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