Alright, so I’ve stopped taking the bait and picking fights with the anti-indexing brigade on social media. I like to think it’s a sign I’m finally ‘adulting’. But if I see one more LinkedIn post about how a handful of stocks drove all the returns of the S&P 500 in 2024—and why this is supposedly an existential problem for index investing—I might just scream into a void.
The S&P 500 delivered over 23% return in 2024. But, in their classic game of spotting the dark cloud in the silver lining, the naysayers love to point out that if you exclude NVIDIA’s astronomical gains—up a jaw-dropping 171% for the year—the S&P 500’s return would have been significantly lower. Touché!
Repeat after me: return concentration in public markets isn’t a bug, it’s a feature.
Since 1926, just 3.4% of stocks have accounted for all the net wealth created in the U.S. stock market. This fascinating nugget of wisdom comes courtesy of Professor Hendrik Bessembinder, who has made a career of unearthing truths about wealth creation in equity markets. His 20231 research shows that between 1926 and 2022;
What’s more, 120 companies (just 0.43%) created 60% of this wealth, and 317 companies (1.13%) created 80% of net wealth.
Wouldn’t it be lovely to only invest in those winners? That’s the dream the entire asset management industrial complex has been chasing since the dawn of time.
In a follow on research paper published in 20242, Bessembinder and his colleagues analysed 29,078 publicly listed common stocks from December 1925 to December 2023. They found that 52% of stocks actually delivered negative cumulative returns (as in purely negative return, rather than relative to one-month Treasury bonds like they did in the prior research).
Let that sink in. The typical publicly listed company is a net loss maker over its lifetime. But when you combine the performance of all companies, the average outcome isn’t just positive—it’s extraordinary when compounded over time. How is that possible?
It’s all thanks to the positive skewness of returns. Think about it: the most you can lose on a stock is 100% of your investment (as long as legal systems incorporate limited liability) , but the potential gains are essentially uncapped. This means that a few extreme outliers—the “superstar” stocks—generate returns so enormous that they more than make up for the losses of the majority.
And this is where the magic of indexing shines. You don’t need every stock in your portfolio to be a winner. Most of them can lose money, as long as you hold the few of those outliers that deliver astronomical returns.
Wouldn’t it be great to just skip the losers and only invest in the winners? Of course! But after decades of trying, the investment management industry has proven this is easier said than done. That’s why Jack Bogle came along over 50 years ago and said “Stop looking for the needle in the haystack. Just buy the haystack.”
Indexing is built on the humble acknowledgment that we can’t reliably identify either the winners or the losers in advance. It’s also grounded in the understanding that market returns are positively skewed, and the exceptional performance of a small handful of winners will always compensate for the majority of underperformers.
The power of indexing—aka owning the haystack—is that you don’t need to worry about missing the winners. In fact, those winners are almost always already in your portfolio before they become household names.
It’s active managers—the ones who pick, say, 40 stocks out of the thousands available—who need to worry about return concentration. Because if they miss just 2 or 3 of the top 100 or so stocks that drive the majority of market returns, then they’re in trouble.
NVIDIA alone accounted for 22% of the S&P 500’s return in 2024. The other six members of the so-called "Magnificent 7"—Alphabet, Amazon, Apple, Meta, Microsoft, and Tesla—contributed an additional 33%. Together, this elite group was responsible for 55% of the index's total return, leaving the remaining 45% to all the other companies in the index combined.
But do I lose sleep over the Magnificent 7 potentially losing their momentum or market dominance? Not in the slightest.
Let’s rewind to 2016. If you’d reviewed the top wealth creators of all time up to that point (1926 to 2016), you’d have seen names like Exxon Mobil, Apple, Microsoft, IBM, General Electric, and Altria (formerly Philip Morris, yup, the cigarette giant). Guess what? NVIDIA wasn’t even in the top 100. TESLA wasn’t in the top 300!
And yet, as an index investor, NVIDIA was already sitting quietly in your portfolio, biding its time. You didn’t need to predict its meteoric rise. All you had to do was sit tight, and watch paint dry.
When NVIDIA and the current crop of superstar stocks have had their day in the sun, they’ll eventually retreat. And the next generation of top performers—which are likely already sitting in your index portfolio—will take over.
The market’s superstars will come and go, but the beauty of indexing is that you’re always holding the next big winners—long before anyone even knows their names.
And if you think return concentration is unique to the U.S.—the supposed bastion of winner-takes-all capitalism—think again. Bessembinder3 and his colleagues studied the long-term outcomes of 64,000 global stocks from January 1990 to December 2020. They found:
As it turns out, return concentration is even more pronounced outside of the US!
So, the next time someone wrings their hands about the “concentration of returns” in a handful of stocks, remind them: “Thus has it been. So shall it be. Now and forever more. Amen 🙏”
1 - Bessembinder, Hendrik (Hank), Shareholder Wealth Enhancement, 1926 to 2022 (June 17, 2023). Available at SSRN: https://ssrn.com/abstract=4448099 or http://dx.doi.org/10.2139/ssrn.4448099
2 - Bessembinder, Hendrik (Hank), Which U.S. Stocks Generated the Highest Long-Term Returns? (July 16, 2024). Available at SSRN: https://ssrn.com/abstract=4897069 or http://dx.doi.org/10.2139/ssrn.4897069
3 - Bessembinder, Hendrik (Hank) and Chen, Te-Feng and Choi, Goeun and Wei, Kuo-Chiang (John), Long-Term Shareholder Returns: Evidence from 64,000 Global Stocks (March 6, 2023). Financial Analysts Journal, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3710251