14 Jun Diversify to capture tomorrow’s winners
Most investors could probably name off the top of their heads some of the stocks which have created much of the shareholder wealth on the US market over past 90 years. Yet to name at least a handful of these top wealth-creators in mid-2017, investors have, of course, the great advantage of hindsight. In this article Robin Bowerman, Principal, Market Strategy & Communications at Vanguard Australia, shares with us his thoughts on diversification.
It’s an investment fundamental that past performance is not an indication of future performance. Recent research confirms that relatively few stocks account for much of the shareholder wealth created by the US market between July 1926 and December 2015.
Just 30 individual stocks collectively account for almost a third of the net wealth. And 86 stocks, or less than a third of 1 per cent, account for more than half of the wealth created.
The draft research paper – Do stocks outperform Treasury bills? by Arizona State University Professor of Finance, Hendrick Bessembinder, includes a fascinating list of the top wealth creators in their time on broad market during the almost 90-year research period.
This research attempts to capture the experience of a hypothetical investor who reinvests the dividends yet does not invest any additional capital. And the wealth created is defined as the excess amount shareholders would have earned by investing in shares rather than short-term government bonds.
Professor Bessembinder calculates that the broad US market earned a total of almost $US32 trillion in net wealth.
The top six wealth-creating stocks were:
1. Exxon Mobil. Wealth created: $US939.8 billion. Time on market during research period: 1073 months, or almost 90 years.
2. Apple Inc. Wealth created: $US677.4 billion. Time on market during research period: 420 months, or 35 years
3. General Electrics. Wealth created: $US597.5 billion. Time on market during research period: 1073 months, or almost 90 years.
4. Microsoft. Wealth created: $567.7 billion. Time on market during research period: 357 months, or almost 30 years.
5. IBM. Wealth created: $487.3 billion. Time on market during research period: Almost 30 years.
6. Altria Group. Wealth created: $448.1 billion. Time on market during research period: 1073 months, or almost 90 years.
In addition to Apple and Microsoft, other stocks that have created huge amounts of shareholder wealth in the shortest time to rank near the top of the shareholder wealth-creators over the past 90 years include Amazon (14th in shareholder wealth creation with less than 19 years on the market during the research period) and Alphabet (parent of Google, 16th in shareholder wealth creation, 11 years on the market).
“Simply put, very large positive returns to a few stocks offset the negative returns to more typical stocks,” Professor Bessembinder writes.
Although this might encourage some investors to attempt to pick a select group of wealth-creating stocks, the reality is that this study demonstrates how identifying such companies with absolute certainty can only be done in hindsight.
For investors wanting to capture wealth-creation in future, the best answer lies in broad diversification. A share portfolio that holds a broad basket of companies, big and small, is in the best position to capture future growth from tomorrow’s wealth-creating stocks.
If you would like to discuss your investment options please call us on 02 9633 5530 or contact us and our experienced Financial Adviser Chris Kelly can guide you.
Please keep in mind that the above is general advice only and is the view of Vanguard Australia’s Robin Bowerman . Please seek advice before acting on any information in this article.