If you’re looking for stock tips, take a moment to think about this astonishing fact from the Wall Street Journal before hitting the Buy Order button in your brokerage account.
Statistic: Between 1926 and 2015, one third of the cumulative wealth created by the U.S. stock market was attributable to just 30 stocks.
The sobering reality is hot stock tips that produce Google or Amazon-like percentage gains are rare.
If you are on the hunt for stock tips, your ultimate financial goal is to build wealth and robo-advisors may well be a better option to achieve your retirement nest-egg goals.
What % Of Stocks Are Superstocks?
If you were to hazard a guess at the percentage return Amazon generated since it went public in 1997, what number would you pick?
Did Amazon share price gain 100%, 1,000%, or 10,000%? From its $1.96 IPO price (adjusted for stock splits), Amazon gained a whopping 49,000% over the subsequent two decades.
By all measures, Amazon falls into the rare category of being labeled as a superstock.
The holy grail as an investor is to find superstocks and hold on to them for the long term. But what is the likelihood that you will discover them before their share prices skyrocket?
Out of 25,782 companies publicly traded between 1926 and 2015, a full one third of the cumulative wealth generated by the U.S. stock market was attributable to just 30 stocks according to Jason Zweig of the Wall Street Journal.
When investors visit a financial advisor, they are often shown a graph of average stock market returns. But the returns of the average stock are vastly different from the average return of the market.
Half of all the wealth generated for investors over the nine decade period was attributable to just 0.33% of companies according to Professor Hendrik Bessembinder of Arizona State University.
If you were to pick a stock at random to buy, it turns out that there is more than a 50:50 chance the company you buy will lose money over its lifetime in the public markets.
In fact, the 1,000 top performing stocks account for all the stock market’s gains over this period, meaning that only 4% of stocks produced 100% of the wealth.
Strip those top performers out and the stock market wouldn’t have been worth owning at all.
Even superstocks are hard to hold at times. Even though Amazon grew by 49,000% twenty years after its IPO, it fell by 95% during the 1999 – 2001 stock market crash.
The reality is the likelihood of a hot stock tip turning into a superstock is so rare, it is akin to the proverbial hunt for the needle in the haystack.
Even classic advice to diversify into a portfolio of 15 to 30 stocks risks underperformance. Professor Bessembinder found that a portfolio of 25 stocks still has a 64% chance of underperforming the market.
Is it any wonder why one of billionaire investor Warren Buffett’s most famous investing quotes is to simply buy the S&P 500?
What Are The Top 20 Superstocks?
Only 20 stocks accounted for 25% of the wealth creation in the U.S. stock market between 1926 and 2015.
The wealth creation contribution percentages (as measured by capital investment and rates of return in excess of the yield of 1-month U.S. Treasury bills) of the top 20 stocks were as follows:
|% Contribution to Wealth Creation in U.S. Stock Market Between 1926-2015
|Johnson & Johnson
|Wal Mart Stores
|Procter & Gamble
Source: Professor Hendrik Bessembinder, Arizona State University
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Pick A Robo-Advisor
The astonishing percentage gains from superstocks make them alluring but they are so rare that a better approach for most investors is to buy low-fee index funds.
If you prefer a hands-off approach to investing in low-fee index funds, consider a robo-advisor.
Betterment has staked its claim as one of the leading robo-advisors by offering an extensive range of services, including both purely digital advice and a premium version that provides access to human advice.
5 out of 5 stars
via Betterment secure site
Betterment imposes no account minimum to get started with its basic service, Betterment Digital, for which it charges 0.25% of AUM annually.
Its higher tier service, Betterment Premium comes at a slightly higher cost of 0.40% annually but includes unlimited phone and email access to CFP professionals.
Prospective clients concerned about how challenging it is to pick stocks that outperform can rest easy because Betterment applies Modern Portfolio Theory to build diversified stock and bond portfolios.
For investors concerned about the social impact of how they allocate their dollars, Betterment also offers Socially Responsible Investing portfolios that align investments with values.
>> Related: What Is A Betterment Tax-Coordinated Portfolio?
Another leading robo-advisor, Personal Capital, includes access to financial advisors in its basic automated investment management service offering, albeit at slightly higher fee levels and a higher account minimum of $100,000.
Fees range from 0.49% to 0.89% depending on the size of your account. Up to the first $1 million, fees are at the high end of the range.
Over and above its white-glove advisory service, Personal Capital shines when it comes to its mobile app.
The mobile app is best in class with features that let you track your cash flow, budgeting, portfolio holdings, allocation or get access research & insights.
|PERSONAL CAPITAL SPOTLIGHT
4.5 out of 5 stars
via Personal Capital secure site
>> Related: Compare Personal Capital Vs SoFi
The account minimum at Wealthfront of $500 is a lot lower than it is at Personal Capital and the fees charged are also quite a bit lower.
Wealthfront is laser-focused on delivering a purely automated investment management service for 0.25% annually and shines when it comes to tax-optimized portfolios.
Wealthfront claims its tax-loss harvesting and tax-optimized services can enhance after-tax returns by up to 2% annually.
4 out of 5 stars
via Wealthfront secure site
>> Related: Betterment Vs Wealthfront Review
Have you traded hot stock tips? How did they work out for you? Share your trading stories and experiences in the comments below. We would love to hear from you.
>> Compare SoFi Vs Wealthfront Robo-Advisors
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