Dimensional Fund Advisors posted an article on May 11 that every investor should read: Singled Out: Historical Performance of Individual Stocks.

The authors,Bryan Ting, PhD, Researcher, and Wes Crill, PhD, Head of Investment Strategists and Vice President make a fact-based, if not frightening account of how diversification will beat the performance of many, many individual stocks over various time periods. They observe that, “Single stocks have a wide range of returns. Only about a fifth of stocks survive and outperform the market over 20-year periods.” The Exhibit 1 chart in the article tells the whole story.

That’s a stunner, and should cause you to evaluate what you want from your portfolios and how you are going to manage it based on your individual personal goals.

Stocks are the engines of personal wealth. No argument there, but the decision to own stocks brings up many more decisions that must be made before dropping your dollars into something you may not really understand. For instance: Which stocks? Which industries? What is the right time to buy? The right time to sell? Should it account for 1% of your portfolio or 100%? What research did you perform? Are you buying on a hunch? And so on, and so forth, and on and on and on.

Diversification is one of the best risk-management tools that an investor can use, that does not inhibit the ability to capture market returns over time. Its not a tool for those interested only in potentially outsized short-term gains; it is, however, THE tool for patient, thoughtful and serious investors.

And one of the simplest and most efficient ways to be the market and achieve proper diversification is to use low-cost exchange traded funds to build an effective long-term portfolio.

Read the full article here.

PS-WealthKeep is not affiliated with Dimensional Fund Advisors or the authors, and receives no affiliate fees for our readers accessing the article through the links provided.