Lately, I’ve seen pundits caution stock investors due to “narrow leadership.”
That is, of all the stocks available, a significant portion of the total gain in the current rally stems from just a handful of stocks.
Currently, the pack pulling most of the rest with it includes companies like Apple, Nvidia, Tesla, Meta and Microsoft.
The pundits, apparently, think some of these leaders have run too far too soon and thus put the rally in jeopardy as they may reverse recent gains.
I caution against their caution.
According to studies by the Arizona School of Business, narrow leadership in the stock market is common.
Its studies show that over the past 96 years of 28,000 stocks making up the exchanges, 16,000 of them decreased in value, while 12,000 increased in value.
So, if you blindly picked a stock, there’d be a 60% chance you’d lose money.
However, the same studies show that the leadership was not evenly distributed among the 40% with increased value.
Of the 12,000 stocks with increased value, 11,950 of them increased in value by $35 trillion.
The best 50 stocks, however, increased by $29 trillion.
Said another way, 50 out of 28,000 stocks made up nearly half of all gains.
That’s almost half the gains from less than 0.2% of the stocks available.
Unfortunately, the leaders are not the same decade after decade.
In the late 1990s, darlings included Dell, Cisco Systems, EMC and AOL.
30 years prior the peloton consisted of stocks like Kodak, IBM and Xerox.
This does not mean you need to find future leaders in the stock market to potentially enjoy portfolio growth.
Instead, consider owning broad stock index funds.
This way, you’d own leaders of future markets, whichever they may be. Of course, you’d also own all the laggards included in the index.
That’s how diversified investing works.
But, if history repeats, future leaders will pull the rest with them, and portfolio growth may indeed follow.
Good luck.
Source: www.dailyprogress.com
Be First to Comment