Why a few winners drive most of the returns

The Pareto principle — roughly 20% of causes produce 80% of results — shows up everywhere in investing.

Returns are lopsided

• Across markets, a handful of assets delivered far more than the rest, while others went nowhere for decades. (Markets in the chart have different start dates — newer ones such as crypto only have a few years of history.)
• Across stocks, studies of US shares since 1926 found that a small minority of companies created almost all of the stock market's wealth; most individual stocks did worse than Treasury bills over their lifetime.
• Across time, a few months make most of the gains (see no exposure, no upside).

How to make sure you own the winners

You cannot know in advance which ones they will be. You can make sure you are exposed to them:

• Own the whole market through an index fund, so the big winners are always inside.
• Spread across asset classes, because leadership rotates: one decade it is US tech, another commodities or gold.
• Let winners run. Trend-following does this naturally — it stays in rising markets and leaves falling ones, so capital drifts towards what is working.

Related: diversification · momentum

By Dr. Harry Hamann · 4 min read