When More is More: A Case for Diversification

In 2022, nearly 60% of U.S. households owned stocks, which is the highest rate recorded.¹ This interest in the stock market is a positive trend as investors may be recognizing that stocks have historically outperformed other asset classes, albeit with periods of volatility along the way.

However, there can be a vast difference in investing in individual companies compared to mutual funds and exchange-traded funds (ETFs). Selecting individual stocks often requires time to research and an understanding of the business fundamentals such as debt, cash flows, revenues, and valuation to determine a potential solid investment. In addition, while investing in individual companies can lead to significant outperformance relative to the market, this investment approach can substantially increase portfolio risk and volatility.

If you’ve heard the phrase “don’t put all your eggs in one basket,” here’s why it matters, especially now:

1. The market is highly concentrated. As of 1/31/24, the top 10 largest stocks by market capitalization make up 30% of the S&P 500 Index.

2. Your chances of losing money in individual stocks are higher compared to holding mutual funds and ETFs. Looking at the 5-year performance of all the publicly listed U.S. stocks, nearly one-third lost money from the beginning of 2019 through the end of 2023.

   It was not just small, unheard-of businesses that fell victim to market forces. Large and well-known companies also suffered serious declines.

   By comparison, less than 1% of mutual funds and ETFs lost money, which speaks to the power of diversification in investing in a broader portfolio that seeks to achieve the greater likelihood of positive returns and lower risk.

Investing requires a long-term perspective. Jemma Financial can help you build a diversified portfolio based on your situation, taking into account your age, financial goals and risk tolerance. Click here to get started.

1 Board of Governors of the Federal Reserve System, 10/23.