Nine good reasons to diversify your investments

A cigarette manufacturer, a quarry and a railway company complete the podium for the best investments in the last century. Yet you probably didn't pick them out, and that's exactly the point. Here are nine reasons for a broad diversification.

Professor Hendrik Bessembinder from Arizona State University analysed the performance of all 29,754 shares listed on the US stock markets between 1926 and 2025 (source). His conclusions are somewhat sobering for anyone who thinks stock picking is akin to a bit of detective work. And they also form the strongest arguments for diversification.

1. The chances of picking out the big winner are small

Around 5,000 shares are currently listed on the US stock markets. Anyone who chooses US shares at random has a 0.02% chance of picking out the top share of the next century. And even that figure is somewhat flattering, as the best-performing share of the next hundred years may not even exist yet.

The study also shows that just forty-six companies generated half of all net stock market gains in the last century, representing a total of around $91,000 billion. When taken together, all the wealth created came from less than 4% of stocks (source). Everything else more or less broke even, or even lost value.

2. Typical shares are losers

It outlook becomes even bleaker for typical shares: the median return of almost 30,000 shares combined was negative over their entire trading life, at -6.9%. Nearly six out of ten shares underperformed short-term US Treasuries, the most boring investment imaginable (source). The stock market as a whole therefore created enormous prosperity, but average individual shares did not. People who select a handful of shares are statistically more likely to pick the losers than the winners.

3. It is impossible to identify the winners in advance

A company that makes its consumers ill and isn't allowed to advertise doesn't sound like the best investment of the last century at first glance. However, if you had invested $1 in cigarette manufacturer Philip Morris (now Altria) in 1926, you would have had around $4.4 million in your pocket thanks to reinvested dividends at the end of 2025. Vulcan Materials, a quarry operator, is in second place, and a railway company rounds out the top three (source). In short, there is a world of difference between picking the winners afterwards and identifying them beforehand.

4. Anyone who diversifies is likely to have winners in their portfolio anyway

The other side of the coin – which is more reassuring – is that you don't have to find the needle; instead, you can just buy the haystack. Those who invest in a broad index fund or tracker can be sure that the future best performers are in their portfolio, albeit with all the losers, too. Yet the mathematics of the stock market are in your favour, as a share can only lose a maximum of 100%, while a winner can multiply by a factor of a thousand or more. Holding a few shares that take off is more than enough to make up for everything else. In other words, the secret to holding the winner is to hold all the losers at the same time.

5. Diversifying dampens the fluctuations

Diversification isn't called the only free lunch in investing for nothing. Investments that do not move in perfect unison generally level each other out, which reduces the flexibility in your portfolio as a whole. This is no small detail, as a portfolio that falls less will also have a shorter climb afterwards to recover. If you lose 20%, you will need 25% profit to return to zero, while if you lose 50%, you'll have to double it. Note: The notion of the free lunch mainly applies within the same asset class. Going from a hundred to a thousand shares usually reduces your risk without losing any return. If, on the other hand, you add bonds, you are buying additional stability with a long-term return.

6. You protect yourself against the unexpected

A failed product, technology that makes an entire sector obsolete, or a trade war that impacts one country. Individual companies, sectors and even countries can be destroyed by unpredictable events. As an example, investors who mainly hold shares in their own employer or country build up risks that they barely see. Diversifying across asset classes, companies, sectors, themes and regions ensures that a bit of bad luck won't have a huge impact on your assets.

7. An index can also be too concentrated

If you buy a tracker on a known index, you will ensure good diversification straight away. However, this also deserves a closer look. In the US S&P 500, the ten largest companies today represent around 40% of the entire index, which has roughly doubled in ten years, with levels higher than those seen during the peak of the dotcom bubble (source). For every €100 invested in such an index fund, around €40 is spread across just ten companies, which have a strong focus on the same theme. Anyone who really wants to diversify should therefore also look at broader world indices and other regions.

8. Different investments absorb different storms

Diversification goes beyond holding a whole host of different stocks. Whether it's shares, bonds, real estate, commodities or crypto, each asset class reacts differently to inflation, interest rate movements and recessions. Quality bonds generally perform better when shares fall, while gold often acts as a shock absorber during times of geopolitical tension. No single asset class performs well in every climate, but together they form a portfolio that can display greater resilience to events than each component can on its own.

9. Diversification protects you from yourself

The last reason is perhaps the most important one – a diversified portfolio is easier to maintain. Anyone who invests in a few shares is drawn to the screen every time the price falls and is more likely to sell in a panic – which is usually the worst time. A broadly diversified portfolio fluctuates at a gentler pace, feels less like gambling and helps you to stay invested during the good and bad times. And this is what determines the lion's share of your return in the long term.

A hundred years of stock market history therefore teaches people to show humility above all, as even the professionals rarely succeed in selecting the elusive winners in advance. The good news is that you don't have to, either. Broad diversification has never been easier and cheaper than it is today, such as withtrackers on global indices.

Before investing, be sure to read up on the key features and risks of financial instruments.

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