Tuesday, 2 April 2019
How Concentration Affects Portfolio Performance
Read? How Concentration Affects Portfolio Performance
Vanguard recently came out with a piece that provides investors with additional data to bring to this conversation.
They calculated the returns of Russell 3000 stocks over the last 30 years and found that 47% of stocks were unprofitable investments and almost 30% lost more than half their value. They also found, and this is the big one, that 7% of stocks had cumulative returns over 1,000%.
Hmm .. Peter Lynch is proved right!
Read? Peter Lynch on His Secret to Superior Returns (2)
Hmm ... long term retail investors should be doing ...
Read? Portfolio Management Concentrate (Verb) or Concentrate (Noun) - Refresh
You may like to make your own judgement call!
Concentrate as verb or concentrate as noun!
That winning word in investing world!
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Hi Uncle8888,
ReplyDeleteThat's why there's 2 approaches in stocks: try to select the winners, or simply go with overall market indexing.
The holy grail has always been trying to find the winners from the start. This is usually by pure luck & a little bit of skill. Usually is used by snake oils to earn money from selling method rather than from stocks themselves.
The more likely occurrence is people buying a good spread of different stocks - some will be winners while others will be losers. Along the way they will cut the losers & add on to the winners & try to find other new winners. After many years hopefully what they have will be many winners.
In practice will be tough because many winners can appear to be losers at many points in their lives e.g. Apple, Amazon. So it can involve cutting, then buying back later, maybe years later. It is hard to change your mind about a stock you think is a loser for many years. For many people, they also find it difficult to cut, especially if the stock had done very well for many years, e.g. GE or some of our S'pore GLCs.
For broad indexing, you end up with both the losers & winners. Indexing is auto self-renewing, so along the way the losers will eventually get smaller & smaller and get thrown out, while the winners get bigger & bigger in the index. However because this can occur over many years & decades, and because of the many companies inside broad indexes, you won't get the big returns compared to holding individual winning stocks. Otoh you also don't get the big -90% or -100% with holding individual losing stocks. :P
There have been previous similar studies on S&P500. I forgot the sources, but I found the following:
Although market is a winner but most stocks are losers
Summary:
From 1950 to 2016, the S&P500 gained 6,400% (excluding dividends some more).
But out of 26,000 US companies listed from 1926-2015, only 983 companies (4% of them) provided all the aggregate gains.
The top 86 winning companies (0.33%) contributed 50% of the gains.
Moral of the story and also advice from WB is better for retails to do indexing
DeleteIt's good to try both. Maybe for newbies to start with 80% indexing & 20% stock picking.
ReplyDeleteAfter a while, will know if more or less indexing is the way to go; some may decide 100% indexing, while some may discover they are the next WB or PL ;)