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WHY DID THIS STRATEGY WIN THE STOCK MARKET?
Research conducted in 2013 found that, by randomly selecting 30 stocks from the top 1000 companies, and buying them all in equal proportions…you’re increasing the likelihood that such a portfolio would contain smaller stocks, which have more potential for higher growth. And because monkeys weren’t emotional and didn’t sell when CNBC has a scary spooky headline – that led to an outperformance of the entire market, year over year.
Or, in other words…smaller companies have a stronger likelihood of seeing higher than average returns, and when you BUY those companies in equal proportion to LARGE, established growth stocks at random – you increase your chances at beating the overall market.
Index funds, on the other hand…represent companies in proportion to their size, and therefore – top 10% of stocks contribute to almost 50% of the overall index….slowing DOWN your overall return, by giving you smaller, more stable growth. For example, between 1980 and 2015…smaller stocks returned 11.24% annual growth on average, while large stocks returned 8.0%.
So, that just means…when 30 stocks are picked, at random…while investing an equal amount in each…you’re more likely to include smaller stocks, which boost the portfolio’s return when compared to the overall index…and, viola…you’ve just won over the market.
HOWEVER – Even though smaller companies outperformed the market by 1.7%, 96% of the time…they experienced SIGNIFICANTLY more volatility…meaning, just as much as they went UP…they also went DOWN.
The reality is, with investing…you have to balance the amount of money you make, with the level of risk you want to take…and, for most investors…taking the short term volatility of investing in 30 completely random stocks for a 1.7% higher averaged return, doesn’t generally beat the SAFETY of investing in 500 DIFFERENT companies across an entire index, and earn a little less.
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*Some of the links and other products that appear on this video are from companies which Graham Stephan will earn an affiliate commission or referral bonus. Graham Stephan is part of an affiliate network and receives compensation for sending traffic to partner sites. The content in this video is accurate as of the posting date. Some of the offers mentioned may no longer be available. This is not investment advice. Public Offer valid for U.S. residents 18+ and subject to account approval. There may be other fees associated with trading. See Public.com/disclosures/