Median Long-term Returns of U.S. Stocks and Portfolio Concentration

Are concentrated stock portfolios inherently disadvantaged by lack of diversification? In his June 2023 paper entitled "Underperformance of Concentrated Stock Positions", Antti Petajisto analyzes rolling future returns for individual U.S. stocks relative to the broad U.S. stock market (market-adjusted) as a way to assess implications of concentrated stock portfolios. He focuses on median return as most representative of investor experience. He considers monthly rolling investment horizons of five, 10 and 20 years because concentrated stock positions are typically long-term holdings. He looks also at the relationship between 5-year past returns and future returns for individual stocks. Using monthly returns for individual U.S. common stocks from an evolving sample similar to the Russell 3000 (no microcaps) and for the overall capitalization-weighted U.S. stock market during January 1926 through December 2022, he finds that: