When it comes to investing in the stock market, there is a common misconception that every stock in one’s portfolio needs to perform well in order to achieve significant returns. However, a closer look at market dynamics reveals that the performance of a select few stocks can have a disproportionate impact on overall market performance. This phenomenon is evident in the case of the S&P 500, where just seven stocks have driven the majority of the market’s gains.
The S&P 500 is a widely recognized benchmark index comprising 500 large-cap U.S. companies. Over the past year, the index has experienced an impressive 19% increase. However, what is truly surprising is that out of these 500 stocks, only seven have accounted for a substantial portion of this growth. These seven stocks are Meta, Amazon, Apple, Microsoft, Google, Tesla, and Nvidia. When combined, these stocks have witnessed a remarkable 71% increase in value over the same period.
In contrast, the remaining 493 stocks in the S&P 500 have only seen a modest 6% increase in value. This stark contrast highlights the influence that a small group of outperforming stocks can have on the overall market performance. Had these seven stocks performed similarly to the other 493 stocks, the S&P 500’s gain would have been limited to just 6%. Instead, the outperformance of these select stocks has propelled the index to a 19% gain.
This data emphasizes an important lesson for investors: it is not necessary for every stock in one’s portfolio to perform exceptionally well. Even if a handful of stocks outperform the majority, investors can still achieve significant returns. In fact, having just five out of thirty stocks in a portfolio perform exceptionally well can lead to double-digit returns, as demonstrated by the near 20% gain of the S&P 500.
This phenomenon can also be observed in momentum investing strategies, which strive to identify stocks that are likely to outperform their peers. Two such strategies are Mi India Top 10 and Mi NNF 10.
Mi India Top 10 is comparable to the Nifty 50 performance, a benchmark index in India. Over a span of seven years, this strategy has achieved an impressive gain of nearly 380%, surpassing the Nifty 50’s gain of about 250%. The strategy accomplishes this by selecting ten stocks from the Nifty 50 that are expected to outperform the remaining 40 stocks.
Similarly, Mi NNF 10 focuses on the Nifty Next 50 stocks and has also experienced substantial outperformance. Over a seven-year period, this strategy has achieved a gain of approximately 380%, compared to the Nifty 50’s gain of 140% to 150%. By consistently identifying stocks that are likely to outperform their counterparts, these strategies have demonstrated the power of a few select stocks in driving overall portfolio performance.
The key takeaway from these examples is that investors do not need every stock in their portfolio to outperform in order to achieve market-beating returns. Instead, a small group of outperforming stocks can have a significant impact on portfolio performance. By focusing on identifying stocks with strong potential for growth, investors can capitalize on the power of outperformers.
This concept also holds true for investors with a U.S. portfolio. If an investor were to hold a few of the top seven performing stocks in the US market, their portfolio would likely have outperformed the S&P 500. It is important to note that achieving such results requires careful research and analysis to identify the stocks with the highest growth potential.
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