Lesson of the Century: Most U.S. Stocks Can’t Even Beat a T-Bill

  • In their lifetime, 58% of equities fail to beat Treasury bills
  • Arizona State Professor says a few stocks create most returns

A woman walks past a statue of Albert Gallatin, the 4th Secretary of the U.S. Treasury, while entering the Treasury building in Washington, D.C.

Photographer: Brendan Smialowski/Bloomberg

Of the nearly 26,000 stocks in Hendrik Bessembinder’s database, more than half are losers.

Against T-bills, that is. The finance professor at Arizona State University studied almost nine decades of U.S. stock and bond performance and found that 58 percent of shares fail to outperform Treasury bills in their lifespan.

The research, which is currently a draft, may deal yet another blow to the active fund management industry. The results reinforce the importance of portfolio diversification, according to Bessembinder, and show why many actively-managed portfolios often underperform their benchmarks. Miss out on the relatively few stocks that generate large positive returns, and you lose.

Investors pulled $264 billion from actively managed U.S. equity funds in 2016 and there hasn’t been a calendar year of inflows since 2005, according to data from Morningstar Inc.

The study shows:

  • The average monthly return for U.S. stocks from 1926 to 2015 was 1.13 percent, compared with an average monthly T-bill rate of 0.38 percent.
  • However, on an individual basis less than half of monthly stock returns were positive.
  • Less than 4 percent of stocks in the Center for Research in Security Prices database -- or about 1,000 -- were responsible for all of the $31.8 trillion in wealth created by U.S. equities in the period. Of those, 86 companies generated half of the returns.

To be sure, the stock market as a whole did perform better than T-bills. But that’s attributable mainly to those large returns from relatively few stocks. Exxon Mobil Corp. alone accounted for about 3 percent of wealth created and Apple Inc. for about 2 percent.

“Slightly more than four out of every seven stocks do not outperform Treasury bills over their lives,” the professor wrote in the draft paper published in SSRN, a repository of academic research.

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