In 2008, two investment managers crunched more than 20 years of market data and produced findings that can only be called shocking. Eric Crittenden and Cole Wilcox found that most stocks did significantly worse than the overall market averages over time, and an unexpectedly large number fell dramatically. These losses were offset by a few stocks that rose spectacularly. As Wilcox wrote, “Capitalism produces a surprising number of extreme winners and losers each and every year.”
Examining returns from 1983 to 2006, the two money managers found that 64% of stocks had a lower return than the Russell 3000 index (a measure approximating the entire U.S. market) over the full period. Some 18.5% of all stocks lost 75% of their value or more. On the other hand, 6% of stocks beat the Russell 3000 by 500% or more, and 25% of stocks accounted for all of the market’s gains.
Despite this lumpy distribution, the winners and losers combined to produce average annual returns, including dividends, of about 10% and deliver a fairly smooth ride for long-term investors—a concept that was the foundation of a book I coauthored in 1999, Dow 36,000. During no 15-year period in a century, for instance, have stocks lost money after inflation.
As a result, a simple, profitable way to invest is to buy the market through exchange-traded funds that are linked to an index, such as the Russell 3000 or the S&P 500, or managed mutual funds with strong track records and low turnover and expense ratios, such as DODGE & COX STOCK (SYMBOL DODGX) or T. ROWE PRICE DIVIDEND GROWTH (PRDGX), both members of the Kiplinger 25, the list of Kiplinger’s favorite no-load, actively managed funds. But the findings of Crittenden and Wilcox beckon investors in another direction—toward trying to find the “Golden 6%” of stocks that will produce returns that quintuple those of the broad market.
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