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| Amazingly, the stock market appears to have recovered from COVID-19. As of Sept. 15, the Standard and Poor's 500 stock index was up 6.73 percent, including reinvested dividends. Yet most people didn't get this return, not just because of high fees or panic selling in March, but because the median stock in the S&P 500 lost over 5 percent. This means that about half did better than a 5 percent loss and half did worse.
The return of the S&P 500 was driven by a handful of stocks. In fact, the four most valuable stocks in the index all had great to spectacular returns. Those stocks as well as some others drove the return of the S&P 500.
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Alphabet Inc. Class C
Source: S&P Capital IQ
Own a little of everything
I'm happy to say that I owned each and every one of these stocks through a total stock index fund that owns thousands of companies, including more than the 500 stocks in the S&P 500 index. I had never heard of Zoom Video Communications before COVID-19, but I own this winner: It's up 504 percent. I also own Tesla, up 438 percent.
Of course, I'm not as happy to say that I own the losers, such as ExxonMobil (down over 45 percent) and Occidental Petroleum Corp. (down a whopping 73 percent). But, so far this year, owning every stock was far better than owning the average stock.
Do you think that 2020 has been unusual? According to a study by the Vanguard Group, during the 31 years ended in 2017, the U.S. stock market, as measured by the Russell 3000 stock index, clocked in a cumulative return of about 2,100 percent, or an average 10.48 percent a year.
How did the median stock do? Take a guess:
A. 2,100 percent
B. 1,500 percent
C. 635 percent
D. 7 percent
The answer shocked me. The median stock earned just 7 percent or a mere 0.22 percent a year. (Median means half did better and half did worse.) Though you can diversify by buying 100 stocks, there is still only a 45 percent chance you'll do as well as owning every stock through a total stock index fund.
What this means for you
I expect you already knew that owning every stock maximizes your diversification, which decreases risk. One stock can go to zero, but it's highly unlikely that 3,000 will. What's more, many indexes, such as the S&P 500, are weighted by capitalization — the number of shares outstanding multiplied by price. The bigger the stock, the bigger their impact on the index. This year it has largely been the market's behemoths that have chalked up the biggest gains.
You may not have known that a diversified portfolio also increases your expected return by making sure you own the few winners that drive the market return. Low-cost total stock index funds, like the iShares Core S&P Total U.S. Stock Market ETF (ITOT) and the Vanguard Total Stock Market ETF (VTI), assure that you will own those winners. I suspect that's why the fund-research company Morningstar awards both of these funds its highest forward-looking gold ratings.
None of us knows which companies will be the stars for the remainder of the year, next year or the next decade. There are only those who think they know. Just make sure you own them with the lowest possible amount of risk — by owning every stock.