DO STOCKS OUTPERFORM TREASURY BILLS (CASH)? AND WHEN?

We all understand that over the long-term, the stock market has historically provided a better return than the returns you get by keeping your money in cash. The reason we are willing to tolerate the volatility of the stock market is the belief that we will be compensated over the long-term by achieving a higher rate of return than cash.

But there is a catch. While the stock market in aggregate has outperformed cash over most long-term periods, how have individual stocks done? Well, we know now and frankly it is very surprising what the studies have found.

Henrick Bessembinder of the Arizona State University Department of Finance recently released a study entitled “Do Stocks Outperform Treasury Bills?” The paper studies the performance of the 26,000 companies that have had their stock publicly traded from 1926 to 2015. They found that 58% of common stocks had returns less than Treasury bills over the stock’s full lifetime.

The most remarkable finding of this study was that of the 26,000 stocks that an investor could buy during that time frame, only 86 of those companies accounted for over half of the wealth creation of the entire stock market. If you didn’t own those select 86 out of 26,000 stocks but owned the other 25,994 stocks, you would only have had half the return of the long-term stock market performance.

Finding the needle in the haystack seems easy compared to those odds. The only way you know you will own these home run companies is to own all the stocks. That means that you also own all the stocks that went bankrupt. But the handful of stocks that had huge returns more than offset the vast majority of stocks that didn’t even do as well as cash, or did even worse.

This is why we invest the way we do. By using index funds to invest in the various parts of the market, we gain exposure to all the companies in that index- the good and the bad. But we eliminate the chance of not finding the handful of top performing stocks which vary from year to year.

The study also observes how the returns of the stock market similarly come in just a handful of days. Attached is a chart that shows if you miss the 30 best days of the 5,040 trading days between 1996 and 2015, you missed the entire return of the stock market. You could have been fully invested for 5,010 of the 5,040 trading days and earned nothing.

So it is literally a handful of companies and a handful of days that account for all the returns in the stock market. That is why we invest in the broad index rather than try to guess which stocks or which days to be in the market. We believe the evidence is very clear that this strategy gives you a better chance of success than picking individual stocks.

Thanks,
Beach

Views expressed in this newsletter are the current opinion of the author, but not necessarily those of Raymond James & Associates. The author's opinions are subject to change without notice. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. Information provided is general in nature, and is not a complete statement of all information necessary for making an investment decision, and is not a recommendation or a solicitation to buy or sell any security. Past performance is not indicative of future results. There is no assurance these trends will continue or that forecasts mentioned will occur. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Index Funds and Exchange-traded products (ETPs) are complex financial instruments that may not be appropriate for all investors. Some ETPs employ, to varying degrees, sophisticated financial strategies in order to achieve their investment objectives. Investing in ETPs poses unique risks to investors and such risks are noted in the product's prospectus. Investors should consider the investment objectives, risks, and charges and expenses of mutual funds and exchange-traded products carefully before investing. A prospectus which contains this and other information about these funds can be obtained by contacting (insert FA name). Please read the prospectus carefully before investing.

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