Underperformance of Concentrated Stock Positions

Abstract

Contrary to standard investment advice, many high-net-worth investors hold concentrated positions in single stocks, which may constitute 10-20% or more of their total portfolio assets. While most investors recognize that lack of diversification increases the volatility of portfolio returns, they may not understand that concentrated stock positions usually contribute negatively to portfolio returns. Since 1926, the median ten-year return on individual U.S. stocks relative to the broad equity market is –7.9%, underperforming by 0.82% per year. For stocks that have been among the top 20% performers over the previous five years, the median ten-year market-adjusted return falls to –17.8%, underperforming by 1.94% per year. Since the end of World War II, the median ten-year market-adjusted return of recent winners has been negative for 93% of the time. The case for diversifying concentrated positions in individual stocks, particularly in recent market winners, is even stronger than most investors realize.

Keywords: Diversification, skewness, long-term reversal, concentrated stock position, high-net-worth investor

JEL Classification: G10, G11