Most stocks lose money, actually

• Here’s a surprising reality: the majority of individual stocks actuallylose money. And Treasury bills have delivered better returns than nearly 60% of stocks ever listed on Wall Street.

• But if the overall US stock market has skyrocketed, that’s because a small number of superstar stocks have done the heavy lifting, driving most of the gains and making up for all the duds.

• If you're set on turning a small investment into big returns and have a proven edge for picking winning stocks, a concentrated portfolio of a few high-conviction picks could work. But if you recognize that stock picking is tough, a passive strategy might be smarter. By investing in the whole index, you gain exposure to those rare, high-flyers that can supercharge your portfolio, while also benefiting from the steady, long-term growth of the overall market.

Most investors know that the stock market can offer solid long-term returns, but here’s a surprising reality: the majority of individual stocks actually lose money. In fact, nearly all the wealth generated in the stock market comes from a very small number of shares. Let’s take a look at what that means for your portfolio strategy.

Fact 1: Most stocks lose money.

That’s a hard truth, I know. When finance professor Hendrik Bessembinder crunched the numbers on all US common stocks from 1926 to the end of 2023, he found that 52% of the 29,078 shares in the big, comprehensive Wall Street historical database ended up with negative compounded returns (including dividends) over their full lives.

The median – that is, the midpoint performer of the group – saw a cumulative compounded return of -8%. Yep, so your typical stock loses money.In a study four years earlier, Bessembinder discovered that an investor would have done better by simply holding Treasury bills (basically, super-safe government bonds) than nearly 60% of stocks. JPMorgan conducted similar research and found that more than 40% of all companies that have ever been in the Russell 3000 have at some point faced a “catastrophic stock price loss” – a 70% drop that was never recovered.So here’s your gritty reality check: if you buy a single stock, you’re more likely to face a loss than a gain, and there’s a troublingly high chance that it’ll be a catastrophic drop.

Fact 2: But there are a few megawinners.

Here’s the plot twist: despite the dead weight from all the shares that have lost money over that period, the US stock market has skyrocketed. And that’s because a small number of superstar stocks have done the heavy lifting, driving most of the gains and making up for all the duds.It’s actually jaw-dropping: from 1926 to 2019, just five companies were responsible for 12% of all the net wealth created in the US stock market, according to Bessembinder’s research. Only 83 companies – just 0.3% of all stocks – accounted for half of the market's total wealth creation.

Overall, around 1,000 stocks, or just 4% of the entire sample, generated all of the net wealth over that period.And it’s even more dramatic on the global stage: between 1990 and 2018, 61% of non-US stocks performed worse than Treasury bills, and less than 1% drove all the net wealth creation.To understand just how powerful these mega-winners can be, consider this: 17 stocks delivered returns of over 5,000,000% (that’s $50,000 for every $1 invested).

The stock with the biggest cumulative return – Altria Group (formerly Philip Morris) – experienced a mind-blowing cumulative return of 265,000,000% (so a smoking $2.65 million for every $1 invested). And if you're looking at annualized returns over a period of at least 20 years, AI sweetheart Nvidia takes the crown with a 33.38% compound annual growth rate.This just goes to show the massive potential of landing a mega-winner: get it right, and you could reap a fortune on your investment.

Okay, so what can you make of all this?

These twin jaw-droppers leave us at a crossroads: do you cast a wide net to catch whatever comes your way, or do you dive deep looking for a few rare pearls – at the risk of coming up empty-handed?

The right approach should arguably depend on two things: your goals and risk tolerance (in other words, how much you’re aiming to make and how badly a loss would hurt), and – more importantly – how good you are at spotting a winner.If your aim is to turn a small investment into life-changing money at all costs and you’ve got a proven edge at picking successful shares, then a concentrated portfolio of a few high-conviction bets might make sense. The data makes clear that the stock market is a winner-takes-all kind of game, after all.

But if you accept that picking the right shares is incredibly hard – and let’s be honest, if it were easy, active fund managers wouldn’t have such a hard time beating the index ETFs – then you’re probably better off taking a passive approach, at least for the bulk of your portfolio.Remember, if you pick a stock at random, the odds are heavily stacked against you. But if you buy the whole index, you get exposure to those rare moonshots that can massively boost your investment mix, while benefiting from the solid long-term returns that the broad stock market tends to deliver.