Diversified Stock Portfolios Underperform Passive Indexing

Michael Harris
2 min readNov 24, 2023
Photo by Karolina Grabowska

Many investors are searching for the next Nvidia, Apple, or Tesla. Naïve diversification may not capture the future big winners. These investors may be better off with passive index investing.

Identifying the next big stock market winners is not trivial at all, and some may argue it is impossible due to market uncertainty and fast-changing regimes. But many try to make their dream a reality: get that stock that will generate 20% or more on average in the next 30 years. This turns out to be an exercise in futility, based on the statistics shown below.

In this article, I use simulations to show that, on average, buy-and-hold investors who diversify in the hope of catching large winners underperform passive index investors.

For the analysis in the article, we used Norgate data, which includes current and historical constituents for several stock market index indices. Without considering delistings, the analysis in this article would not be realistic. We highly recommend this data service (we do not have a referral arrangement with the company).

The Simulation

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Disclaimer: No part of the analysis in this blog constitutes a trade recommendation. The past performance of any trading system or methodology is not necessarily indicative of future results. Read the full disclaimer here.

Charting and backtesting program: Amibroker. Data provider: Norgate Data

Original article



Michael Harris

Ex-fixed income and ex-hedge fund quant, blogger, book author, and developer of DLPAL machine learning software. No investment advice. priceactionlab.com/Blog/