Why Most Stocks Underperform and What to Do About It

Only 4% of U.S. stocks account for nearly 100% of long-term market wealth creation.
Let that sink in.

This isn’t speculation, it’s math. Professor Hendrik Bessembinder of Arizona State University published a landmark study titled “Do Stocks Outperform Treasury Bills?”, and the results shook the foundations of active investing. Over half of all individual stocks underperform U.S. Treasury bills over their lifetimes. But a tiny sliver (just 4%) are responsible for the entire net gain of the U.S. stock market since 1926.⁽¹⁾

And yet, we see it constantly: investors trying to pick the next Tesla, time the next dip, or outguess the market.

The truth? The market isn’t won by bold predictions. It’s won by consistent discipline.

Why Index Investing Works So Well

Legendary investment thinker Charley Ellis famously compared investing to amateur tennis. The winner isn’t the person who hits the flashiest shots. It’s the one who makes fewer unforced errors.

“In investing, activity is almost always the enemy,” Ellis said. 

Index investing works because it embraces this idea. Instead of trying to pick the few stocks that will outperform, it owns the entire market, ensuring that when the winners emerge, you already own them.

When you invest in a broad market index like the S&P 500, you automatically:

• Capture the few companies that will drive the next generation of growth,
• Avoid over-concentration in companies that fade or fail,
• Reduce fees, trading costs, and emotional decision-making,

And most importantly — you avoid betting your future on being right.⁽²⁾

Most Stocks Lag the Index

Market-cap-weighted indexes like the S&P 500 are designed to adapt. When a company like Nvidia grows, its weight in the index increases. When a company declines, it naturally shrinks or drops out.

This makes the index a self-cleaning portfolio, and thus a powerful mechanism that captures winners and filters out losers without human intervention.

By contrast, most individual stock investors:

• Hold too few names
• Get overconfident in trends
• Chase returns or follow tips
• Panic during drawdowns
• Trade too often or too late

In short, they make the very unforced errors Ellis warns about.

So, What Should You Do?

The most successful investors aren’t the ones constantly trying to outguess the market. They’re the ones who build resilient portfolios and commit to a thoughtful, long-term plan. Today, a sound investment strategy often emphasizes broad diversification across asset classes and geographies, low-cost and tax-efficient core holdings, and a strong focus on behavioral discipline to help avoid emotional, reactive decisions. This kind of approach recognizes that in a market where only a small percentage of stocks drive the majority of long-term gains, consistent exposure, rather than constant prediction, is what positions investors for success.

In recent years, many forward-thinking advisors have added a layer of risk management to this framework by incorporating options-based strategies. These strategies aren’t designed to chase outsized returns, rather they’re designed to shape the return profile of a portfolio, providing protection during periods of volatility and helping safeguard wealth during pivotal moments like market downturns, retirement transitions, or business liquidity events. It’s a shift in mindset: not about chasing higher highs, but about protecting against damaging lows.

Final Thoughts

If you’ve ever felt like you’re missing out by not owning the latest high-flying stock, it’s important to remember the odds are stacked against individual stock pickers, indexing ensures you own the rare winners, and when paired with the right tools, you can also defend your portfolio without sacrificing long-term growth. Investing success isn’t about heroic moves or bold predictions. It’s about minimizing unforced errors, staying disciplined, and allowing math, markets, and time to do their job.

If you’re rethinking your current strategy or simply want a second opinion, Herbein Financial Group team is here to help. We welcome the opportunity to talk with you about building a portfolio that’s efficient, protected, and aligned with your long-term goals.

Article contributed by Matt Kline

 ⁽¹⁾  Bessembinder, H. (2018, September ). Do stocks outperform Treasury bills? Retrieved from Science Direct: https://www.sciencedirect.com/science/article/abs/pii/S0304405X18301521

⁽²⁾ Andrew Shuman, C. (2025, April ). Less-concentrated markets could buoy active managers. Retrieved from Vanguard: 

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