Here are some mathematical facts:
- The best-performing stocks can go up over 100% or more in any given year.
- The most one stock can go down is 100%.
- 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?
|Delta Air Lines||+157.90%|
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.