Why Picking Individual Stocks May Not Be Your Best Bet for Long-Term Wealth
When we think about investing, the stories of massive returns from stocks like Amazon and Nvidia often dominate the conversation. But these stories can be misleading, especially for those hoping to grow wealth over the long term. The reality is that more than half of U.S. stocks since 1925 have delivered negative returns over their lifetime.
Given this statistic, relying on individual stock picks to build wealth might not be the safest strategy. Instead, understanding how the stock market grows and the role of diversified investing can help you make more informed decisions. Here’s what you need to know.
The Reality Check: Over 50% of Stocks Fail
Research shows that around 51% of U.S. stocks end up with negative lifetime returns. Out of 29,000 stocks tracked since 1925, only a small number have gone on to deliver substantial, positive returns. In fact, most stocks only last about 11 years on average before they either go bankrupt, are delisted, or are acquired. This high rate of stock “failure” highlights the challenges of relying on individual stock-picking as a strategy.
For most investors, putting all their hopes in a few individual stocks is a risky endeavor. When over half of all stocks end up losing money, the odds of picking a consistent winner are… not favorable. This is especially true when trying to beat the long-term market average—a feat that even professional investors often struggle with.
The Long-Term Average: Growth Driven by a Few Outliers
The average return for all U.S. stocks is incredibly high, around 22,840% over their lifetimes. But this number is misleading because it’s heavily skewed by a few exceptional performers. When looking at the median return, it’s actually negative, around -7.4%. This stark difference between average and median performance shows that a few “home-run” stocks lift the entire market, while the majority don’t fare as well.
The S&P 500 index, which tracks a diversified selection of large U.S. companies, has averaged a 13.2% annualized return over the last 95 years. One dollar invested in this index in 1929 would be worth over $128,000 today. The S&P 500 doesn’t rely on a single winner; instead, it captures broad market growth, benefiting from the high performers among its 500 companies while minimizing the impact of underperformers.
This demonstrates why broad-based indices like the S&P 500 are attractive to long-term investors. By investing in an index, you capture a proportional share of the market’s winners without having to gamble on individual stocks. This approach effectively balances risk and reward, allowing for consistent, steady growth over time.
Examples of Long-Term Growth Stocks: Altria, Vulcan Materials, and Others
A small number of stocks have managed to deliver substantial gains over decades. Stocks like Altria, Vulcan Materials, Pepsi, and Abbott are among the some of the top performers in U.S. stock market history. For example, investing just $1 in Altria at its inception would be worth over $130,000 today due to its annualized compound return of 16.29%. These companies have demonstrated the power of long-term, stable growth in the market.
On the other hand, while “hot stocks” like Nvidia have shown impressive gains over the past twenty years (Nvidia has an annual compound return of 33.38%), they are rare exceptions. Few stocks manage to consistently perform at that level over decades, and even high-flyers can be subject to volatility and risks.
These examples underscore that while short-term gains are exciting, long-term, consistent growth is more likely to come from steady, less volatile indices. The power of compounding over decades rewards those who are patient and invested in diversified or stable growth stocks, not those chasing quick returns.
The Power of Diversification and Compounding
Given that over half of all individual stocks fail to generate positive returns, investing broadly rather than narrowly becomes crucial. By diversifying across many stocks—for instance, through an index like the S&P 500—you reduce the risk of your portfolio depending on one or a few companies’ success. You’re also more likely to capture the high returns generated by those rare, high-performing stocks.
Additionally, compounding returns over long periods is one of the most powerful tools in investing. Consistent, small investments over 20, 30, or 40 years can turn into substantial wealth, even if the annual return doesn’t seem extraordinary.
By spreading out investments and staying in the market for the long term, you give yourself the best chance to benefit from compounding. This strategy leverages both the returns of high-growth outliers and the stability of large, diversified funds.
Practical Steps for Long-Term Success
Here are some actionable steps based on this understanding of the market:
- Diversify Broadly: Instead of betting on individual winners, invest in a broad market index like the S&P 500. This approach lets you capture the market’s rare, high-return stocks without taking on the risk of individual stock-picking.
- Stay Consistent: Consistent investments over time can build wealth through compound interest. Small, regular contributions to your investment account can have a massive impact over decades.
- Adjust Expectations: Don’t chase after high annual returns of outliers like Amazon or Nvidia. Realize that most individual stocks won’t survive the long haul, and focus on broader, steadier gains.
- Focus on “Boring” but Steady Companies: Stable industries often produce consistent returns, even if they’re not as exciting. Vulcan Materials, a company in the unglamorous business of crushed stone and gravel, has delivered a 39 million percent cumulative return over decades. Sometimes, the least flashy stocks quietly provide the most value over time.
Embrace “Strategic Compounding”
In summary, building long-term wealth isn’t about chasing the next big stock. Instead, it’s about strategic compounding—using time, consistency, and diversification to let the market work for you. By focusing on a diversified index and staying committed to a long-term strategy, you increase your chances of capturing the high returns that a few outliers bring to the market, while reducing the risk of losing money to failing stocks.
This approach helps you avoid the “winners and losers” game and instead positions you for steady, compounding growth over time. So while picking the next Amazon or Nvidia is alluring, the real power lies in holding a diversified portfolio that gives you access to those rare winners without relying on luck or timing.
Bessembinder, Hendrik. “Which U.S. Stocks Generated the Highest Long-Term Returns?” SSRN, 22 July 2024.