I have to admit having to look at this chart a few times to get the gist of it (future data crunch perhaps!).

From Motley Fool (based on JP Morgan research):

Let me put this in layman’s terms (see notes below if looking for more detail):

• From 1980-2014, almost 2 out of every 3 stocks in the Russell 3000 (which includes both large cap and small cap companies) underperformed the index.
• The top 7% of stocks (measured by their performance) in the index were classified as “extreme winners” and were principally responsible for the index being up almost 50-fold over this 34 year period (I wasn’t able to verify this but trust that Motley Fool did the math correctly). Hindsight bias might make you think you could pick those top-performing stocks ahead of time (Amazon, Google, Apple, Facebook) but that is wishful thinking.
• The Russell 3000 index is constantly being updated which explains why there are more than 3000 companies included in this analysis which covers the period from 1980-2014.

The moral of the story: One advantage of buying an index is that you don’t have to try and predict who the “extreme winners” are Remember that only about 7% of the companies in the index fall into that category, so despite your hubris and hindsight bias (of course, I knew that Google was going to be BIG!), you are unlikely to be that discerning. Oh, and if you want to go the stock picking route, remember that almost 2/3 of stocks in the index underperformed the index itself!

Here’s a good explainer from Motley Fool:

JPMorgan’s data shows 64% of stocks underperformed the overall index from 1980-2014. About a third were reasonable winners, and 7% of components absolutely knocked it out of the park. The return of those 7% was enough to not only offset the losers, but push the entire index up almost 50-fold.

From JP Morgan notes:

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.