It was back in 1924 that it was first generally recognized that diversification was the equity investor's biggest friend. A properly-diversified portfolio of equities would outperform bonds by huge amounts with very high provability over long-enough horizons. The problem is that while "diversification" might have been reasonably accomplished with ten well-chosen stocks back in the mid-twentieth century, in the past generation it has required more like fifty. And if we truly are moving into more of a winner-take all economy, in the future it may take 100: Terry Smith: Busting the myths of investment: Do equities outperform bonds?: "The degree of concentration of returns is still startling. Just five companies out of the universe of 25,967 in the study account for 10 per cent of the total wealth creation over the 90 years, and just over 4 per cent of the companies account for all of the wealth created.... The study also looks at returns decade by decade and reaches more or less the same conclusion: that the decade returns for most equities are lower than those earned by investment in Treasury bills...
...Moreover, the results have been getting worse for equity investors more recently. Of the stocks floated between 1947 and 1956, 87 per cent had higher returns than US Treasuries. This fell to 61.5 per cent for those entering from 1957 to 1966 and just 31.7 per cent of those floated from 1977 to 1986. Most alarmingly, the median stock entering the market since 1977 did not just underperform Treasuries but had a negative return. This may be attributable to the type of companies which floated in recent decades, which many have characterised as showing revenue growth, but very poor earnings. What conclusions to draw from all this? Stocks in aggregate outperform bonds, but most stocks do not and positive returns are concentrated in very few stocks. Most active investors are doomed to underperform not only the equity indices but also bonds...
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