Do You Own the Top 10 Best-Performing Stocks?

Here are some mathematical facts:

  1. The best-performing stocks can go up over 100% or more in any given year.
  2. The most one stock can go down is 100%.
  3. As a result, a few stocks going up more than 100% can outweigh the few that go down 75% or more.

[Tweet "When it comes to stock portfolios, it's what you don't own that hurts you."]

2013's Best-Performing Stocks

What were the top 10 best-performing stocks in the Standard & Poor's 500 in 2013?

Netflix, Inc. +342.10%
Micron Technology +263.40%
Delta Air Lines +157.90%
Pitney Bowes +136.70%
Boston Scientific +136.10%
Facebook, Inc. +135.00%
Hartman International +131.70%
E-Trade Financial +123.70%
Actavis Plc  +119.70%
Gilead Sciences +119.60%

  Not owning the top 10 best-performing stocks represents an "opportunity cost" that contributes to active, stock-picking managers under-performing a broad stock market index. Chances of picking a majority of the top 10 performers in advance are very slim.

A study of data provided by the Center for Research in Security Prices at the University of Chicago came to the following stunning conclusion:

  • 9.6% compound average annual return from 1926 to 2012
  • 6.3% return after excluding the top 10% of performers each year
  • -0.6% return after excluding the top 25% of performers each year

Lesson for the day: A broadly diversified stock index fund should be the core of your portfolio.