The S&P 500 is composed of 503 stocks. Since the last trading day of last year, 233 of these stocks or nearly half, have had a negative return. Despite this, the total return for the index since that date (YTD) is 12.51%. How is this possible?
This can be attributed to diversification. By spreading your investment across all 503 stocks, you significantly reduce your risk and increase your chances of returning a profit. The index itself is extremely strong and resilient, often maintaining a positive return even when many individual stocks perform poorly. This shows the importance of diversifying your portfolio by investing in an index fund rather than placing a large amount of money into individual stocks. If you had invested heavily in just a few stocks, you could have easily chosen poorly and ended up with investments that underperformed.
Diversification helps mitigate your investment risk and will likely lead to more stable returns.
Source: Yahoo Finance & Slick Charts
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