A well-diversified strategy with wider exposure across the market might seem less thrilling than chasing leaders, but might give investors a better chance to meet goals.
Like the proverbial fisherman, many investors daydream about the ones that got away. They tell themselves, “If only I’d invested in such and such stock at such and such time, I could have retired by now.”
Alas, it’s hard to be certain which stocks or stock sectors are going to ultimately take off, and even experts often can’t time the market. Remember what a certain well-known comedian once said: “Eighty percent of success is showing up.” Meaning it’s often best to make sure your money stays invested through good times and bad and is spread relatively broadly across the market, rather than trying to nail whatever might be the next flavor of the decade.
“There’s no way to know which stocks will continue to do well,” said Keith Denerstein, director, investment products and guidance, TD Ameritrade. “Most people can’t pick the next Amazon and get in at exactly the right time.” A well-diversified investment strategy that exposes your portfolio to many sectors and types of stock can often give you a better chance to meet your long-term goals. Some investors might also find it’s easier to follow such a strategy using a managed portfolio (more below).
As a long-term investor, you probably understand the advantage of having a diversified portfolio and investing across different stock sectors. Still, such a strategy might seem less thrilling. There might be a little voice in your head encouraging you to go for the big money. When names like Apple (AAPL) and Amazon (AMZN) take off and many of us watch from the sidelines as they create riches for their investors, that makes it easier to ignore the “slow and steady wins the race” side of our brains and be tempted to drop a chunk of dough on some biotech or info tech stock that looks like it might be the next Alphabet (GOOG).
However, as a recent article in The Economist pointed out, the best-performing stocks are few and far between, making it tough to choose the right ones. Between 1926 and 2016, just five stocks—Apple, ExxonMobil (XOM), Microsoft (MSFT), General Electric (GE), and IBM (IBM)—accounted for about 10% of all the wealth created for shareholders, The Economist noted. The top 50 stocks account for two-fifths of the total during that time period. About 25,000 stocks were listed on U.S. exchanges over the last 90 years, making your chance of picking the best 50 rather slim.
Also, those top stocks frequently change over the years. During the 2010s, the so-called “FAANG” stocks–Facebook (FB), AMZN, AAPL, Netflix (NFLX), and GOOG—dominated the markets. By some calculations, these five stocks accounted for a significant portion of the U.S. market’s gains in 2017 and 2018. This isn’t the first time such a scenario occurred, drawing investors toward a small list of names rather than a more even-keel strategy.
“There used to be a handful of stocks when they coined the term blue chip,“ Denerstein said. “It was called the ‘Nifty 50.’ The idea then was to just put your money in those and you were good. Until the day they fell apart and you weren’t.”
In short, there’s always likely to be a “flavor of the month” drawing headlines and making you feel left out if you don’t own it, but these flavors come and go, as anyone who invested heavily in the dot.com sector in the late 1990s can tell you through sad experience.
The other complication when you try to pick a small group of stocks is timing. It’s easy to look a FAANGs now and point to their success, but what’s going to be the next list of hot names or stock market sectors? No one really knows, and often by the time they do, it’s too late to get in early. If you buy the FAANGs now, for instance, you’re paying in part for their past performance, which isn’t guaranteed to continue.
Do Not Sell or Share My Personal Information
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
Carefully consider the investment objectives, risks, charges, and expenses before investing. A prospectus, obtained by calling 800-669-3900, contains this and other important information about an investment company. Read carefully before investing.
Asset allocation and diversification do not eliminate the risk of experiencing investment losses.
TD Ameritrade and all third parties mentioned are separate and unaffiliated companies, and are not responsible for each other’s policies or services.
Inclusion of specific security names in this commentary does not constitute a recommendation from TD Ameritrade to buy, sell, or hold.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC, a subsidiary of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2024 Charles Schwab & Co. Inc. All rights reserved.