Frequent visitors to our blog will tell you that we know nothing about stock picking. They’re right. In fact, we are convinced that it is just about impossible to consistently outperform a given index by trying to choose the best stocks. Of course, fund managers will tell you otherwise. It is their job, after all, to convince you that money invested with them is much more likely to grow at rates consistent with your goals.

Let’s have a look at a recent study from J.P. Morgan to show you why that isn’t likely to happen, and to demonstrate how diversification could be the right alternative. The study shows the returns of individual securities within the Russell 3000 Index, compared to the overall index between 1980 and 2014. The Russell Index contains the 3,000 largest US companies or around 98 percent of the market capitalisation on Wall Street. The report takes into account securities that were taken over or that went bankrupt. The results are sobering:

Two-thirds of all shares have underperformed the index. The return on the median stock since its inception compared to an investment in the index was -54 percent.

40 percent of shares recorded an absolute loss.

40 percent of shares had a ‘catastrophic crash’ (greater than -70 percent) from their peak and failed to fully recover (less than 60 percent growth from the nadir).1

In short, there are far more underperformers than outperformers. The above results can be seen in the following graph: