Most ASX shares lose money. Here's how to overcome the odds: expert

Here's how to best ensure your portfolio houses the ASX's best wealth building stocks.

A surprised and curious male investor drinks black coffee while reading the latest news on rising ASX shares in the newspaper

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Key points

  • Widely cited research has found a small handful of ASX shares are behind nearly all of the bourse's historical gains
  • Such findings might lead investors to attempt to identify the few shares capable of posting whopping returns in coming years
  • However, building a diverse portfolio is likely a more reliable way to make the most of stock market opportunities 

It might sound like an astounding statement, but it's been proven to be true. Most ASX shares ultimately turn out to be bad investments.

It's been found that just 4% of listed companies were behind the US stock market's gains over the 90 years to 2016. Such research has since been replicated using Aussie stocks with similar findings.

Luckily there's a simple trick that can help fans of ASX shares invest in future winners. And it's backed by a top expert.

Most ASX shares found to lose money

Most ASX shares underperform US Treasury bills, according to Arizona State University finance professor Hendrik Bessembinder.

His widely cited 2018 paper, published in the Journal of Financial Economics, found the most common outcome for an investor buying a random US-listed stock is a near-100% loss.

The research has since been updated to include shares housed on the ASX, concluding with broadly the same findings.

Thus, the returns we've grown to know and love from markets have been provided by a few top-performing outliers.

Fortunately, Bessembinder, who is in Australia speaking at forums hosted by MFS, Baillie Gifford, and Orbis this week, has some golden advice for investors wishing to get on board market winners.

Shoot for the moon or scoop up the stars

Bessembinder's research seemingly kicked off the 'moonshot investing' craze. It sent many off to buy shares in companies they believe have the potential to post dazzling returns.

Of course, that's easier said than done. Few, if any, ASX shares have ever been obvious outperformers from the get-go.

So, is diversification the key to realising massive stock market returns?

By scooping up a diverse portfolio of stocks across various sectors, an investor is far more likely to hold a future star. Bessembinder says, courtesy of The Australian:

The textbooks lay out all the reasons why people should have a broadly diversified, low cost, portfolios.

My study backs that up. You're just picking stocks at random and the odds are worse than 50-50 in order to outperform the benchmarks.

Thus, diversification can be both a risk management strategy and provide greater exposure to the 4% of ASX shares that are likely winners.  

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