Should You Buy Individual Stocks or Diversify?

Hello,

Is investing in single stocks a good idea?

Quick poll: (and no looking it up!)

What company in the S&P500 has had the highest average annual return since it went public?

Axon Enterprise

Apple

Monster Beverage Corp

Costco

Broadcom

Amazon

When I speak to people over the age of 50 and mention "The Stock Market" it's not uncommon for them to have a negative point of view of the market.

Younger investors tend to have missed the boat on working with Financial Advisors, where during a certain period of time the industry was primarily Stock Brokers. Stock Brokers were paid on commission and the compensation structure back then was incentivized to buy and sell more often.

When we had the late 90s Tech Boom, stocks were hot and the fear of missing out was real.....until they were not. The market crashed in the early 2000s, many of these companies going out of business. Not long after, we had The Great Recession of 2008-2009. I believe this condensed period of poor performance is why many investors have a bad taste in their mouth for those who bought stocks that never recovered.

When we look at the data on individual stocks, it can help inform our investing decisions today. See below:

Only 20% of individual stocks survive and outperform the general market over 20 year periods For stocks that have out performed the market over the prior 20 years, on average only 30% of these stocks continue to outperform over the following 10 years. Said differently, if we start with 500 stocks to choose from only 100 of those outperformed over a 20 year period and only 30 of those outperformed over a 30 year period. And for stocks that have underperformed over the last 20 years (stocks that are on sale), their chance of outperforming over the next 10 years is also only 30%. Stocks that outperformed over the past 20 years, still had a 3% chance of being delisted due to financial reasons within the next 10 years. Nearly 20% of stocks become delisted from the markets due to financial reasons The median stock underperforms the market over 5, 10 and 20 year periods

Second, individual stocks tend to be more volatile. If a stock goes down 20% and then goes back up 20% you are actually NOT back to even. Here is how the math works:

20% decline = you need a 25% increase to get back to even. 30% decline = need 43% 50% decline = need 100% 75% decline = need 300% 90% decline = need 900%

Most investors today understand that a well diversified portfolio, while maybe it doesn't give you the most bragging rights, is the bedrock that one can build their Financial Plan on.

PS: I will reveal poll results next month.