{"id":45,"date":"2025-05-05T12:38:15","date_gmt":"2025-05-05T16:38:15","guid":{"rendered":"https:\/\/people.bsu.edu\/econbriefs\/?p=45"},"modified":"2025-05-05T12:38:15","modified_gmt":"2025-05-05T16:38:15","slug":"why-you-should-diversify-your-stocks-by-dr-cecil-bohanon-and-dr-john-horowitz","status":"publish","type":"post","link":"https:\/\/people.bsu.edu\/econbriefs\/2025\/05\/05\/why-you-should-diversify-your-stocks-by-dr-cecil-bohanon-and-dr-john-horowitz\/","title":{"rendered":"Why You Should Diversify Your Stocks \u2013 by Dr. Cecil Bohanon and Dr. John Horowitz"},"content":{"rendered":"<p><span data-contrast=\"auto\">Financial experts often recommend buying and holding a diversified portfolio of assets to build and maintain personal wealth. One of the most important reasons for a diversified portfolio is that the stock market gains come from a few firms. Stock market returns from most firms don\u2019t do as well as investing in Treasury Bills.\u00a0\u00a0<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><a href=\"https:\/\/papers.ssrn.com\/sol3\/papers.cfm?abstract_id=3537838\"><span data-contrast=\"none\">A recent study found that between 1926 and 2019<\/span><\/a><span data-contrast=\"none\">,<\/span><span data-contrast=\"auto\"> most U.S. publicly traded common stocks reduced investor wealth. Moreover, the top 83 firms out of the 26,168 in U.S. stock markets account for half of the stock market\u2019s wealth creation. Most wealth creation occurred in a few industries: technology, telecommunications, energy, healthcare, and pharmaceuticals. <\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><a href=\"https:\/\/papers.ssrn.com\/sol3\/papers.cfm?abstract_id=3710251\"><span data-contrast=\"none\">In another paper, the authors examined how nearly 64,000 global common stocks performed com<\/span><\/a><span data-contrast=\"none\">pared to<\/span><span data-contrast=\"auto\"> U.S. treasury bills from 1990 to 2020.\u00a0 55% of U.S. stocks and 57% of non-US stocks had lower compound returns than U.S. Treasury Bills. During the same period, the best-performing 2.4% of companies accounted for nearly all net global stock market wealth creation.\u00a0<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><a href=\"https:\/\/academic.oup.com\/rfs\/advance-article-abstract\/doi\/10.1093\/rfs\/hhad065\/7241703?redirectedFrom=fulltext\"><span data-contrast=\"none\">Another recent paper<\/span><\/a><span data-contrast=\"auto\"> showed that while most stock market gains come from \u201cstar firms,\u201d such companies didn\u2019t generate extraordinary stock market returns by using their market power to restrict competition. They developed more valuable innovations. In other words, wealth creation usually comes from better products and more efficient technologies rather than lobbying. However, the pharmaceutical companies did receive much of their wealth through patent protection of their new drugs.\u00a0<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">The non-linearity of these results reminds us of the 19<\/span><span data-contrast=\"auto\">th<\/span><span data-contrast=\"auto\">-century social scientist Vilfred Pareto\u2019s finding that Italy&#8217;s richest 20% of the population owned 80% of the wealth. This observation became the famous 80\/20 rule that 80% of outcomes are due to 20% of the causes. The 80\/20 principle has been applied to many events and activities, including quality control, rainfall, and volunteer contributions to non-profit entities. However, the non-linearity of these stock market returns is that not just 20% of stocks created 80% of the returns, but less than 5% created all or nearly all of the stock market returns.\u00a0<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">What is the takeaway for the average person? Trying to pick individual stocks for the average person is a fool\u2019s errand, like trying to find a needle in a haystack. One is much better advised to invest in a broad portfolio of individual stocks, a mutual fund, or market index funds. The stock market is not exactly a lottery, but one is well advised to buy many different tickets.<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Financial experts often recommend buying and holding a diversified portfolio of assets to build and maintain personal wealth. One of the most important reasons for a diversified portfolio is that the stock market gains come from a few firms. Stock market returns from most firms don\u2019t do as well as investing in Treasury Bills.\u00a0\u00a0\u00a0 A [&hellip;]<\/p>\n","protected":false},"author":112,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[441],"tags":[443,445,450,388,453,451,447,457,460,458,452,442,456,45,461,454,448,449,446,459,444,455],"class_list":["post-45","post","type-post","status-publish","format-standard","hentry","category-investment","tag-diverisfy","tag-diversified-portfolio","tag-energy","tag-finance","tag-global-common-stocks","tag-healthcare","tag-investor-wealth","tag-lobbying","tag-non-profit","tag-patent-protection","tag-pharmaceuticals","tag-portfolio","tag-star-firms","tag-stock-market","tag-stock-market-returns","tag-stocks","tag-technology","tag-telecommunications","tag-treasury-bills","tag-vilfred-pareto","tag-wealth","tag-wealth-creation"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v28.4 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Why You Should Diversify Your Stocks \u2013 by Dr. Cecil Bohanon and Dr. John Horowitz - Econ Briefs<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/people.bsu.edu\/econbriefs\/2025\/05\/05\/why-you-should-diversify-your-stocks-by-dr-cecil-bohanon-and-dr-john-horowitz\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Why You Should Diversify Your Stocks \u2013 by Dr. Cecil Bohanon and Dr. John Horowitz - Econ Briefs\" \/>\n<meta property=\"og:description\" content=\"Financial experts often recommend buying and holding a diversified portfolio of assets to build and maintain personal wealth. 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