In the world of investment, the allure of stocks like NVIDIA, with their impressive 200% gain over the last year, often leaves investors wondering, “Why didn’t we focus on Nvidia the last few years?” This semiconductor giant, powering the forefront of AI technology, epitomizes the potential highs of the stock market. However, the broader landscape of stock investment is riddled with complexities that extend beyond the surface-level success stories.

A Study in Stocks: “Do Stocks Outperform Treasury Bills?”
In Hendrick Bessembinder’s paper “Do Stocks Outperform Treasury Bills?” we learn something interesting that seems almost counterintuitive to what most of us think about stocks. Bessembinder’s findings reveal that since 1926, 60% of stocks have failed to outperform the seemingly risk-free treasury bill on a month-to-month basis. This statistic starkly challenges the conventional wisdom of “stocks for the long run” and the widely held belief that stocks inherently yield higher returns than holding cash.

Moreover, the research underscores that a mere 2% of companies have been responsible for 90% of all stock market wealth over the past 98 years, with only 4% of stocks accounting for the entirety of market wealth creation. This insight suggests that investing in stocks, with the expectation of outperforming inflation and generating substantial wealth, may not be as straightforward as traditionally believed.

Implications for Investors:

Diversification is Your Friend
The essence of diversification is underscored by the reality that owning an index fund ensures participation in the wealth created by the market’s top 4% of performers. Diversification means embracing the full spectrum of the market, acknowledging that while not every stock will outshine cash, the aggregate performance of stocks tends to surpass that of bonds. This strategy mitigates the risk of trying to pinpoint the few stocks that will drive wealth creation, emphasizing the importance of a diversified investment approach.

Your Portfolio Needs Rules
For those inclined towards individual stocks with the hopes of capturing a super-performer, the journey is fraught with emotional and financial volatility. Consider Apple’s journey, generating $2.7 trillion in wealth from 1981 to 2022, yet experiencing multiple drawdowns of over 70%. Nvidia’s story is similar, with significant drops in value, highlighting the resilience required to hold onto such stocks through turbulent periods.

This volatility underscores the necessity of a disciplined investment strategy. At TriaGen, we advocate for rules-based portfolios and strategies that aim to mitigate emotional decision-making and focus on long-term goals. This approach is crucial for navigating the inherent ups and downs of the stock market, ensuring that investors can withstand the psychological challenges of significant drawdowns.

Insights for the Savvy Investor:
The journey of investing in stocks is far from straightforward. While the allure of significant gains, like Nvidia’s recent surge, is undeniable, the broader market dynamics and the rarity of true super-performers present a challenging landscape for investors. Bessembinder’s research provides a critical perspective, reminding us that success in the stock market requires more than just selecting the right stocks; it demands a comprehensive strategy that embraces diversification, disciplined investment rules, and a long-term perspective.

Investing is a complex, emotionally charged endeavor that often resembles a roller coaster ride. For those navigating this path, understanding the importance of a diversified investment strategy and the value of a disciplined approach cannot be overstated. If you’re pondering your next move in the investment world, we’d love to chat with you. Schedule a consultation with us or give us a call to explore how you can navigate the stock market with confidence and clarity.