The golden needles in the haystack
What would you do if there was a haystack in front of you but almost all the value of the haystack is in a few golden needles that could be anywhere in the haystack? You could buy any part of the haystack or you could buy an investment that carefully takes a small proportion of each stalk, making sure you get a piece of each needle. You could also simply buy a number of stalks but you don’t know which ones are made from gold. Which option would you choose?
Buying just a few stalks makes no sense – it is very similar to buying a lottery ticket. There is a small chance to strike it rich and a much larger chance to end up with very little. A lot of people are actually living that way, spending large amounts on lotteries of various types, which can be simple gambling or buying very speculative investments where it is easy to lose everything or even more. But this doesn’t make sense when it comes to investments for our future, especially our retirement. So why the haystack analogy? According to an article on Bloomberg less than 1,000 out of 26,000 US stocks or 4% created the entire wealth from shares between 1926 and 2016: https://tinyurl.com/26000stocks The other 25,000 in total created no wealth. Of those 1,000 only 86 created half the total return and Exxon alone created 3% and Apple alone 2% of the total wealth created by 26,000 stocks. If you purchased a lottery ticket in the form of an Apple share you were laughing but almost every other share didn’t do so well.
Hence, unless we have special knowledge, it makes far more sense to buy a share of the total haystack, which will include any golden needles, than to buy a few stalks and to do the investment equivalent of watching the roulette wheel spinning. Investing is very counter intuitive, one of the best strategies is to buy well and then to have the discipline to do nothing. That is where a good financial adviser can come in and help you to buy well and then support you to stay the course when that is the best choice.