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When Less Can Potentially Bring More
View from the Observation Deck
If an investor seeks to outperform a benchmark index, such as the S&P 500 Index, one way to approach the challenge is to simply pare down the number of stocks one invests in.
As indicated in the chart, over the past 12 years (includes 2008 to show impact of financial crisis), the average number of stocks in the S&P 500 Index with positive annual price-only returns (does not include dividends) was 321, or roughly 64% (currently 505 stocks in the index). That means that approximately 36% of the constituents in the index, on average, were providing a drag on returns in a given year.
One of the ways in which an investor might attempt to generate a return that exceeds that of a benchmark index is to identify and eliminate those companies most likely to end up in the red at year-end. Easier said than done.
This is where professionals can add value for an investor. Financial consultants and packaged product vendors have a multitude of strategies designed to potentially outperform the broader market via less diversification.
This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions and other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Index is a capitalization-weighted index comprised of 500 stocks used to measure large-cap U.S. stock market performance.
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Thursday, January 9, 2020 @ 2:14 PM
These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.