Sorry the title of this post is so long. That means it will generate little internet traffic. 6 to 8 words is the sweet spot – my bad. However, this is an important idea that does not get all the press it deserves. So I am here to help out.
The New York Times re-visited an interesting topic the other day. You can get the direct link here: NYT Link . The basic message is that much of the wealth created by the stock market is the result of just a few tremendously well performing stocks. The average stock is more likely to be a dog. So, if you are building your own portfolio, you better hope you choose these super-star stocks that propel the entire market higher. (and do not sell even after it has quadrupled etc. etc.). If you don’t, the article explains, often you would have been better off in a one month T-Bill. (itself a pretty poor long-term performer).
One way to be sure you catch these Super-nova stocks is to buy the entire market. i.e. Passive Investing. Guaranteed to catch all the winners, losers, and the super-stars that help us all build wealth. Nothing magic about these concepts – it is simply that the range between best and worst performing stock is far more extreme than we are used to seeing in everyday life. That guy that speeding on the freeway? Likely he was going 20% faster than you, not 2000% faster.
The chances of picking a super-nova stock? The same as the chances of picking the worst stock out there. By buying all of the stocks in the market, (and tilting the weights to favor value, small cap, profitability etc.) you are guaranteed to capture the next rising star. You catch the wonder that is Capitalism and its ability to create wealth by taking on risk.
So, do the smart thing. Resist the temptation to pick individual stocks, and pick the smarter strategy – pick the stock market. Your retirement will be glad you did.