SHOULD YOU INVEST in the stock market? The answer seems obvious: Over the past 90 years, stocks have returned an average 10% a year, far outpacing bonds at 5% and cash investments at less than 3%.
So why ask the question? The reason is the word “average.” Stock market returns are, of course, uneven from year to year and uneven from stock to stock. That’s well known. But the degree to which stock performance varies from stock to stock may surprise you—and that has implications for how you invest. Arizona State University professor Hendrik Bessembinder provided these unexpected insights in a recent paper entitled “Do Stocks Outperform Treasury Bills?”
What should you conclude from this? Am I saying you shouldn’t invest in the stock market? No, I still view stocks as the best way to increase your wealth over time. But I see three important implications:
If your field of expertise provides you with unusual insight in a particular area, you might be in a position to spot a future Medtronic, Biogen or Qualcomm when they’re just getting started. The good news: If you identify a potential stock-market superstar, you can still keep the bulk of your portfolio broadly diversified—because there’s no need to invest a lot. For example, in 1997, if you had invested just $1,000 in Amazon, you’d have $1 million today.
Adam M. Grossman’s previous articles include Protect Your Privacy, Losing It and Three Ps. Adam is the founder of Mayport Wealth Management, a fixed-fee financial planning firm in Boston. He’s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter @AdamMGrossman.
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