Beware Single Stock Bets

Placing concentrated or single stock bets in the market can really get your heart racing but a recent study highlights the risks of losing money on a single stock bet.

A recently published study “Underperformance of Concentrated Stock Positions” finds that many high-net-worth investors hold concentrated positions in single stocks, which may constitute 10-20% or more of their total portfolio assets. While most investors recognize that lack of diversification increases the volatility of portfolio returns, they may not understand that concentrated stock positions usually contribute negatively to portfolio returns. Since 1926, the median ten-year return on individual U.S. stocks relative to the broad equity market is –7.9%, underperforming by 0.82% per year and 54.6% of individual stocks had negative market-adjusted returns.