Ever heard the phrase, the whole is greater than the sum of its parts? When it comes to the stock market, it may be truer than many investors realize.
Historically, the stock market has been an effective way to build wealth over time. Despite periods of volatility, the market has consistently outpaced inflation, but that doesn’t mean every individual stock succeeds.
In fact, it’s not unlikely to see a stock underperform or fail to keep pace with the broader market. Understanding that this happens can help set realistic expectations for interacting with the stock market today so you can build strategies that can help reach long-term success.
What is the stock market, really?
At its core, the stock market is a marketplace where investors buy and sell ownership shares in publicly traded companies. When companies grow, generate profits, and attract investor interest, their stock prices may rise. When companies struggle, stock prices may fall.
This give-and-take is one reason the stock market today can feel unpredictable. Economic conditions, company performance, industry trends, and investor sentiment all influence stock prices, sometimes dramatically.
According to research published through the Social Science Research Network, only 28% of stocks outperform the market as a whole1. In other words, most stocks fail to beat the broader market over their lifetimes.
This highlights an important investing reality: consistently picking future market winners is incredible difficult, even for experienced investors. You have to be willing to take the risk.
Tracking performance over time
What makes a stock a top performer? The answer is often time.
Companies experience periods of growth, decline, recovery, and reinvention throughout their lifetimes. While short-term gains often grab headlines, long-term performance typically provides a better picture of a company's true value.
Looking at stock performance over time reveals several important lessons:
Companies with steady, consistent growth may prove more durable than companies experiencing rapid short-term success.
Holding a stock indefinitely isn't always the right strategy if the company's fundamentals change.
There is no reliable way to predict which companies will continue delivering strong returns for decades.
As you work with a financial planner to build your portfolio, it’s important to remember that no two companies follow the same path. Two stocks that appear equally strong today could look very different a year or even five years from now.
Because future performance is never guaranteed, focusing on managing risk over identifying the next market superstar is one way to approach the stock market.
Finding a ‘winner’ in the stock market today
While there's nothing wrong with searching for opportunities, relying on your ability to consistently identify future top performers in the stock market can create unnecessary risk.
The reality is that investing involves uncertainty. Markets change, industries evolve, and consumer behavior shifts. Even companies with impressive track records can face unexpected challenges.
Rather than trying to predict which individual stocks will outperform, many investors focus on building strategies that allow them to participate in the broader growth of the market. This approach recognizes that while finding winners is difficult, participating in overall market growth may be more achievable.
Diversifying your stock portfolio
If most individual stocks struggle to outperform the market, why do investors continue investing in stocks at all?
Because they don’t have to take it one stock at a time.
Diversification is a strategy that involves spreading investments across multiple companies, industries, and sectors rather than concentrating on just a few stocks. While owning a single stock can increase your exposure to that company's success or failure, owning many investments can help reduce the impact of any one disappointing performer.
Diversification also helps explain why the stock market can create significant wealth even when many individual stocks underperform. By maintaining broad market exposure, investors improve their chances of benefiting from the success of standout performers seeing strong market gains.
Patience is equally important. Market downturns and periods of volatility are a normal part of investing. Giving your portfolio time to recover and grow allows the power of compounding to work in your favor.
Alternatives to single stocks
Creating a diversified portfolio doesn't always require purchasing dozens or hundreds of individual stocks. Several investment options provide exposure to multiple companies through a single investment.
Index funds
Index funds are designed to track the performance of a single market index. Because they hold all the companies included in the index, they can provide broad diversification while helping investors participate in the performance of a large segment of the stock market.
Exchange-traded funds
Exchange-traded funds (EFTs) are collections of investments that trade on an exchange much like individual stocks. Some ETFs track major indices, while others focus on specific industries, geographic regions, or investment strategies. This flexibility can help investors build diversification around their individual goals and preferences.
Mutual funds
Mutual funds pool money from multiple investors and use those assets to purchase a diversified mix of investments. Many mutual funds are managed by professional investment managers who select investments based on the fund's objectives and investment strategy.
Other diversified investment options
Investors may also consider target-date funds, balanced funds, and professionally managed portfolios. These solutions often combine multiple asset classes, including stocks and bonds, into a single investment vehicle designed around a specific objective, risk level, or retirement timeline.
Becoming stock market savvy
Because so few stocks account for a large share of market returns, the lesson isn't that you need to find top-performing stocks, but that you don't always have to. By focusing on diversification rather than prediction, and working with an investment planner, you can build a strategy that provides broad market exposure while keeping your investments aligned with your financial goals.
After all, building wealth through the stock market isn't about owning every winner. It's about creating a strategy that doesn't depend on finding them.
1Bessembinder, Hendrick.Do Stocks Outperform Treasury Bills?Social Science Research Network / Journal of Financial Economics. (2018).
Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. This material is intended for general use. By providing this content, Park Avenue Securities LLC and your financial representative are not undertaking to provide investment advice or make a recommendation for any specific individual or situation, or to otherwise act in a fiduciary capacity. Please contact a financial representative for guidance and information that is specific to your individual situation.9128550.1 (Exp. 9/28)