If you’ve heard comments like “only a few stocks drive market returns, so indexing is risky”, you’re not alone. At Resolve Financial Solutions, we often talk with clients who are worried that a handful of big companies might be doing all the heavy lifting in the market and what that means for their investments.
We explain below how the data actually supports index-fund investing, why broad exposure still wins and what you should consider.
The Exceptional Few vs. the Many
Research by Hendrik Bessembinder shows a striking fact: in U.S. stock markets from 1926 to 2022, just 3.4% of stocks (around 966 companies of 28,114) accounted for all net wealth creation.
Put simply: most stocks either underperform or deliver very low returns but a tiny number perform extraordinarily well and dominate overall returns.
The median U.S. stock in one big study actually had a negative compound return over its lifetime. And globally, similar patterns show up. For the period from 1990 to 2020, about 57% of non-U.S. stocks underperformed even one-month U.S. Treasury bills.
In other words: the market isn’t balanced in terms of which stocks succeed. That may sound worrying but this is where the genius of indexing comes in.
Why Indexing Thrives in a World of “Winners & Losers”
If a small number of stocks will always generate the vast majority of returns, you might think the only approach is: “I must pick the winners.” That’s a tempting strategy. Yet despite decades of trying, even the professionals struggle to reliably identify those top-performers in advance.
Index funds take a different view. Instead of trying to choose the few winners, you buy the broad market (“the haystack”) and automatically own the winners when they emerge. That means you’re not overly reliant on picking the right share at the right time.
As one writer put it: if you hold a wide enough portfolio you will almost certainly own the future superstar stocks – even if you never knew their names when you bought them.
What This Means for You and Your Investments
- Diversification matters more than ever. The fact that few stocks dominate returns shows how much risk is involved in narrow portfolios. By investing broadly (for example via an index fund) you reduce the risk of missing the big winners or being overweight the big losers.
- Active funds may appear to deliver, but they carry hidden risk. If an investment fund chooses only 40 stocks from thousands, missing just a few of the top-performers can severely hit its performance.
- Stay invested and patient. Because the top returns come from a few outlier companies over a long period, short-term timing is tricky. Long-term, consistent investing is what tends to reward.
- Market concentration is normal – not a flaw. The fact that a few companies hold a large share of returns isn’t a breakdown. It’s how the market has always worked. Knowing this helps you avoid being swayed by alarmist narratives about “too much concentration”.
How Resolve Financial Solutions Can Help
At Resolve Financial Solutions, we work with clients navigating their pensions, investments, mortgage decisions and financial wellbeing. What you need is a solid investment strategy that understands how markets work – not one built on guesswork.
We’ll help you:
- Understand how indexing fits with your personal goals and risk appetite
- Choose the right portfolio mix (UK, global, bonds, equities)
- Know when active management makes sense (and when broad exposure may be better)
- Stay on course and avoid being distracted by market noise about “which 6 stocks will win next?”
If you’re looking for investment clarity that supports your broader financial planning – get in touch. We’re here to help you build a strategy based on evidence, simplicity and your future-focused goals.
Contact us today to review your current investments or get started with a smarter plan.
*Please note: Investments carry risks.