A History Of Wealth Creation In The U.S. Equity Markets

Hendrik Bessembinder contributes to the literature on the returns to public equity investment diversification benefits with his study “Wealth Creation in the US Public Stock Markets 1926-2019,” published in the April 2021 issue of The Journal of Investing. The study updated his 2018 paper, “Do Stocks Outperform Treasury Bills?,” (Summary and More) adding three more years of data. He analyzed the long-run stock market outcomes in terms of the increases or decreases (relative to a T-bills benchmark) in shareholder wealth creation (SWC), considering the full history of both net cash distributions and capital appreciation. His data sampled included all the 26,168 firms with publicly traded U.S. common stock since 1926. In calculating the change in net worth, he explicitly accounted for new share issuances, share repurchases, and the fact that dividends are not (in aggregate) reinvested in the stock market—share repurchases and dividends reduce market capitalization but do not similarly decrease calculated shareholder wealth creation. Following is a summary of his key findings:

  • U.S. stock market investments increased shareholder wealth on net by $47.4 trillion between 1926 and 2019.
  • Technology firms accounted for the largest share—$9.0 trillion—of the total, but telecommunications, energy and healthcare/pharmaceutical stocks created wealth disproportionate to the numbers of firms in the industries—although high-performing tech stocks such as Apple, Microsoft and Alphabet rightly receive a great deal of attention, tech stocks as a group have not been the most reliable performers in the long run.
  • Tech stocks performed more modestly during other periods. For example, they contributed negatively during downturn periods such as 1969-71 (20.0 percent of the market’s negative net wealth creation), 1972-74 (10.9 percent of the market’s negative net wealth creation) and particularly 1999-2001 (46.2 percent of the market’s negative net wealth creation).

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index.

  • The majority (57.8 percent) of stocks led to reduced rather than increased shareholder wealth.
  • Aggregate shareholder wealth creation is concentrated in a relatively few high-performing stocks.
  • The degree to which stock market wealth creation is concentrated in a few top-performing firms has increased over time and was particularly strong during the most recent three years of the study, when five firms accounted for 22 percent of net wealth creation.
  • During that most recent three-year period, 0.04 percent of firms (two of the 4,896 firms with stocks listed) accounted for 10 percent of the $12.8 trillion in gross wealth creation, 0.16 percent of firms (eight of the 4,896) accounted for 25 percent of the gross wealth creation, and 0.98 percent of firms (48 of the 4,896) accounted for half the gross wealth creation.
  • The concentration of SWC is attributable to positive skewness in the distribution of long-run stock market outcomes. Since most individual outcomes in a positively skewed distribution are less than the average outcome, this implies that undiversified portfolios selected at random will underperform the overall market more often than not, reinforcing the prudence and desirability of low-cost, broadly diversified strategies.

Following are important findings from his earlier paper in which he ran simulations:

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Disclaimer: Performance figures contained herein are hypothetical, unaudited and prepared by Alpha Architect, LLC; hypothetical results are intended for illustrative purposes only. Past ...

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