Did you know that only about 4% of stocks have accounted for the entire net gain of the U.S. stock market since 1926?

The vast majority of stocks don’t significantly contribute to market gains, underscoring the difficulty of picking long-term winners.

Today, we’ll take a look at the topic of dispersion:

• Don’t Kid Yourself – Picking Stocks Isn’t Getting Any Easier: First, we’ll discuss why the selection of stocks for your portfolio remains a difficult task 😨

• Greater Dispersion Means Greater Risk: Next, we’ll explain why greater dispersion is more risky 😱

• Greater Dispersion By Itself Isn’t Enough: Finally, we’ll clarify why dispersion is not enough when investing in the stock market ❌

Stay informed and stay ahead of the market with these insights. Let’s bust some myths!

Don’t Kid Yourself – Picking Stocks Isn’t Getting Any Easier 😨

Recent market turmoil has led many analysts to argue that we’re entering a market environment in which stock selection is more likely to beat the market.

That’s because individual stocks’ returns are becoming more widely dispersed—making the difference between winning stocks and losers more stark.

Unfortunately, a greater spread between the stock market’s winners and losers doesn’t necessarily make stock-pickers’ job any easier ⛔

It’s important to understand what greater stock dispersion does and does not mean for investors—and whether we’re entering a period when stock selection is more likely to beat an index fund.

For several years now index funds have had the upper hand, since the market has been dominated by a small handful of mega cap stocks.

Stockpickers became excited when the tide appeared to turn in July.

That’s when this handful of mega cap stocks stumbled and smaller stocks came to life.

Don’t get too excited ✋🏻

There are two major reasons why greater stock dispersion doesn’t mean what stockpickers think it does.

Greater Dispersion Means Greater Risk 😱

While it is true that greater stock dispersion increases the theoretical possibility of picking a portfolio of market-beating stocks, it also increases the theoretical possibility of lagging the market by outsize margins.

Too many of stockpicking’s cheerleaders focus on the former while ignoring the latter.

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Greater Dispersion By Itself Isn’t Enough ❌

The stockpickers also implicitly assume that greater dispersion is all that is needed to increase their odds of success.

But they’re wrong:

Dispersion helps a stockpicker’s odds of beating the market only if smaller- and mid-cap stocks are outperforming large-caps, and this point is easily overlooked 👀

Because performance benchmarks such as the S&P 500 are cap-weighted, they are dominated by their largest-cap stocks.

If those large-caps are also the best performers, a big spread between the winners and losers doesn’t help the stockpicker.

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