Warning, this blog will be a bit nerdy. Stick with me though. I’ll bring it back to plain English.
You might have a large stock position in a single company, or a few companies, for a variety of reasons. Maybe you inherited it. Maybe you received stock grants or stock options as compensation. Maybe you were lucky and bought Microsoft or Apple in the 1980s. Regardless of how you acquired the concentrated position, you should really consider selling some.
Any advisor worth his/her fee will tell you to diversify your big stock positions. Most will tell you that we do so to reduce risk. The chart above shows that we also do it to improve returns, on average.
The chart shows that returns of stocks are positively skewed. What does that mean? A few big winners brought up the average return substantially. The average (mean) return across the S&P 500 companies from 2002-2022 was 390%. The median (half of companies were higher, half were lower) return was only 93%. In fact, only 24% of companies in the index beat the index return. Those aren’t good odds.
That chart only shows large cap U.S. stocks over 20 years, but this phenomenon appears consistently in stock markets around the globe. It’s a good reminder to keep chipping away at your large stock positions. Odds are it will increase your returns.
About the Author: John O’Connor
John has more than ten years experience as an Investment Advisor. He focuses on devising and maintaining portfolios that meet individuals’ needs, investment research, and investment strategy. John has been recognized as a “FIVE STAR wealth manager” by Twin Cities Business Magazine 2016-2022. He is a CFA charterholder and CERTIFIED FINANCIAL PLANNER™ Professional.
Legal Disclaimer: These posts do not constitute an offer or recommendation to buy or sell any securities or instruments or to participate in any particular investment or trading strategy. They are for informational purposes only. CTW gathers its data from sources it considers reliable. However, CTW makes no express or implied warranties regarding the accuracy of this information or any opinions expressed by the author and may update or change them without prior notification.