The Hidden Risk in Your Index: How a Few Stocks Drive the Market
For decades, many investors have put their money in broad market indexes like the S&P 500 for instant diversification. It sounds safe – spread your bets over hundreds or thousands of companies. But a 2024 study of nearly 100 years of stock-market data (CRSP database) reveals a surprising truth: most stocks are losers, and only a very few drive the gains. In fact, more than half of U.S. stocks ever traded never made money. This “concentration risk” means your index returns are carried almost entirely by a handful of big winners, while the majority of holdings quietly lag behind.
Most Stocks Underperform
Bessembinder’s analysis of 29,078 U.S. stocks (1925–2023) found 51.6% had negative lifetime returns. In other words, the typical public company lost money over its full history. (Across all 29,078 stocks, the median cumulative return was –7.41% meaning a majority lost ground.) By contrast, only a tiny fraction of stocks produced the huge gains that fuel index performance. Consider the key findings from the data:
- 51.6% of stocks lost money. Over half of all U.S. stocks ended up below their starting price.
- Almost all the gains came from <1% of stocks. Only 17 out of 29,078 stocks (about 0.06%) delivered cumulative returns above 5,000,000%.
- The biggest winner (Altria/Philip Morris) returned 265 million%. That means $1 invested in Altria at the start would become $2.65 million by 2023.
- Nvidia’s massive run. Among stocks with ≥20 years of data, Nvidia led the pack with a 33.38% annualized return. (Other big tech names also made top returns – Netflix ~32%, Amazon ~31.8% – but still, the vast majority of stocks didn’t come close.)
These facts show a clear pattern: the “average” stock is a loser, but the superstar winners are so large they more than offset all the losers. In plain terms, if you invest in an index fund, you’re holding both kinds – but your gains rely on finding those few winners.
A Handful of Winners Do the Heavy Lifting
Despite thousands of stocks in the market, only a tiny minority generate the bulk of wealth. Bessembinder’s work (and the chart above) illustrates that just a few firms create most of the market’s gains. For example, a prior study found only 120 companies (0.43% of all firms) produced 60% of total U.S. stock market wealth, and just 317 companies (1.13%) produced 80%. The remaining ~99% of companies split the small leftover gains, or simply canceled each other out with losses.
This “winner-take-all” outcome is why we say broad indexes hide the truth: even though you own all 500 stocks in the S&P 500, your return is heavily skewed toward the few that soared. The rest, often 40–50% of those companies, underperform or lose money, dampening index returns. And those few winners didn’t get there by accident. They had long runs of compound growth. In the data, 17 “super stocks” each grew by over 5,000,000% (that’s $50,000 for every $1 invested). Leading them all was Altria (the old Philip Morris tobacco company), which compounded a $1 stake into $2.65 million.
Importantly, these amazing returns didn’t come from startlingly high annual gains, they came from decades of compounding. The top 17 stocks averaged only about 13.5% per year. That kind of growth is below what many hot tech stocks achieve over years today, but persistently earning 13% for 90+ years turned $1 into millions. This underscores the power of time in the market. In fact, Bessembinder himself notes that these results “affirm the importance of ‘time in the market’”. But notice the catch: very few companies benefitted from those extra decades.
Because of this extreme concentration, a portfolio that simply held the entire market benefited from picking up those future winners by chance. If you happened to have been invested in Philip Morris, Coca-Cola, or Nvidia all along, you did great. If not, you lagged. In other words, most index investors ride the coattails of a handful of stocks.
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Index Investing: The Illusion of Diversification
A broad index feels diversified – you own many companies spanning all sectors. But under the hood, the index returns act more like a narrow fund. One recent measure of market concentration (the Herfindahl-Hirschman Index for the S&P 500) is now at record high. This jump is mostly due to a few tech giants. For instance, in 2024 Nvidia alone accounted for 22% of the S&P 500’s gain, and the so-called “Magnificent 7” stocks (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, Tesla) together made up 55% of the index’s total return. That means the other 493 companies in the S&P 500 contributed just 45% of the market’s growth last year.
The chart above illustrates how market concentration has climbed. With few companies dominating index performance, broad index investors effectively rely on a handful of fortunes. The other 90+% of stocks add noise. So while “time in market” ensures those few winners eventually turn up in your holdings, it also means you’re forced to hold dozens of losers just to capture them.
In plain terms, your index fund’s good years are driven by a tiny minority of mega-winners (like the examples above), and your account sags when those fall short. Indexing smooths out returns over the long run, but it can mask the fact that the winners carry the fund. This concentration risk is hidden in a static index. Only by picking individual stocks or dynamically adjusting can you hope to overweight the winners and underweight the losers.
Compounding Counts, But Stock Selection Matters More
It’s true: compounding over time is critical. Staying invested for decades can turn modest growth into massive wealth, as with Altria or Home Depot (which returned ~1.6 million percent over 42 years). However, the data show that “time in the market” is only half the story. Holding many stocks that never become winners is like staying in water that gradually drains from a bathtub; your savings never overflow.
What matters even more is what you hold for all those years. Bessembinder’s study emphasizes that point: if you held only average or below-average stocks for a long time, compounding doesn’t save you; the majority of companies had negative returns over their lifetimes. By contrast, owning even one of the few top-performers can greatly boost your compound return. For example, the median return across all 29,078 stocks was -7.4%, but because of the few extreme winners, the average cumulative return (when weighted) was an eye-popping +22,840%. In other words, huge stock market wealth comes almost entirely from those lucky outliers.
The takeaway is this: time helps compound whatever you hold, but it can’t change a dog into a winner. Simply locking your money in an index means letting chance decide if you accidentally owned the next Nvidia or Amazon early on. Over decades, that does work. Index returns are positive, but you could have done much better by actively tilting toward the winners instead of the many losers.
Tactical Management: Finding Winners, Trimming Losers
So what’s an investor to do? The uncomfortable truth is that passive indexing alone does not capture all the potential reward from the stock market’s winners. If you could somehow identify or predict those few superstocks ahead of time, and overweight them in your portfolio while cutting back on likely losers, your returns could dramatically improve.
This is the promise of tactical portfolio management. A skilled tactical (or active) manager actively shifts the portfolio over time to favor potential winners and avoid laggards. Key elements include:
- Spotting potential winners. Using fundamental research, trend analysis or other signals, a tactical manager might overweight companies showing high growth, innovation or strong financials. For example, long before Nvidia became a household name, a tactician might have noticed its chip leadership and invested more heavily.
- Minimizing the losers. Likewise, a manager seeks to identify stocks or sectors likely to underperform (based on weak earnings, fading industries, etc.) and keeps those positions small or exits them entirely. Given that 52% of stocks historically ended in the red, avoiding many of these losers can save your portfolio from dead weight.
- Periodic rebalancing. A key practice is to regularly rebalance the portfolio. As winners run up in price, the manager takes some money off the table (locking in gains) and possibly reallocates to other opportunities. Conversely, if a stock starts to decline, the manager can cut losses sooner rather than waiting for a big drop. Over time this “sell high, cut low” strategy locks in the performance of winners and limits exposure to the underperformers.
- Dynamic risk management. A tactical approach also means constantly assessing risk. That could involve shifting assets between stocks, bonds and cash or using hedges when markets get frothy. The goal is to protect gains when the few big winners are already well known, and to shield the portfolio if a chosen winner stumbles.
These steps aim to amplify the impact of the rare winners and mute the drag from the rest. In a way, it’s like trying to pick the needles out of the haystack: you give extra weight to the needles that might bring the big returns. As Bessembinder himself notes, an active manager who holds only a few dozen stocks can be in big trouble if they miss even a couple of the top 100 wealth-creators. By contrast, if a manager catches those few winners, the payoff can be huge.
Of course, reliably finding the next multi-million-percent stock is extremely challenging. Nobody has a crystal ball. But by combining research, trend-following, valuation checks and risk controls, a tactical manager increases the odds. And even partial success can vastly improve outcomes. For instance, including even one extra future Nvidia in 2020 instead of a dud stock would have meaningfully raised any portfolio’s long-term return.
The core point is this: not all stocks contribute equally. A broad index is like owning both the winners and the losers, but it doesn’t let you avoid the losers. A tactical strategy tries to overweight the outliers and trim the laggards. It recognizes that which stocks you hold can matter more than how long you hold them.
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Time in Market vs. What You Hold
In sum, time in the market is important, staying invested long enough is how those extraordinary compounding stories unfold. But if you only rely on time and ignore stock selection, you end up owning the many failing companies along with the few successes. The research makes it clear: the market’s gains come from very few companies. If your portfolio holds half losers, you need the winners to carry you.
A tactical manager aims to tilt the odds in your favor. By adjusting allocations, taking profits on big winners, and cutting losses on underperformers, they seek to “manufacture” a portfolio that looks more like the handful of winners and less like the mass of losers. This dynamic rebalancing and risk management can, over long periods, significantly boost your effective compounding rate. In other words, it helps lock in the growth of winners and avoid the silent drags.
What’s Next for You?
For many investors, knowing these facts is empowering. You realize that simply sitting in a passive index might work OK, but you’re leaving money on the table. Time in the market gave the big winners their power; now consider also focusing on which stocks are in your market basket. If you find this concentration story striking, talk to a tactical portfolio manager. We can help you tilt your portfolio toward those kinds of high-potential stocks and away from the chronic losers.
In our practice, we use this research every day. We build portfolios that aim to include the few real market leaders (like Nvidia, Amazon, Altria in their time) while minimizing exposure to the many firms that tend to underperform. We also rebalance regularly to lock in gains from big winners and to cut off positions that aren’t playing out. This approach doesn’t guarantee success; the future is unpredictable. But it tilts the odds toward riding the winners and avoiding the flops.
The Bottom Line
Decades of data show that a very small percentage of stocks drive nearly all of the market’s wealth creation. While “buy and hold” in an index does capture those winners eventually, it also forces you to hold all the losers along the way. A tactical strategy tries to change that balance. By seeking the true winners and cutting the rest loose, a skilled manager can help your portfolio compound faster and smoothly over time. If you want to make sure you’re invested in the companies that really move the market, and not stuck in the silent drags, consider working with a tactical portfolio manager who keeps these insights front and center.
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Sources
Recent academic research by Hendrik Bessembinder (Arizona State University) on 1925–2023 U.S. stock returns, plus analyses by financial news outlets. These studies highlight the astonishing concentration of stock market gains and the importance of the few big winners. The embedded charts illustrate how a tiny fraction of firms produced most of the wealth.
Disclaimer
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