Magnifying Single-Stock Volatility
Single stocks tend to be more volatile than a broadly diversified portfolio.
It’s been a couple of years since the emergence of single-stock exchange-traded funds which, as the name suggests, provide exposure to a single stock. A number of these have focused on Magnificent 7 stocks, likely providing a nauseating recent experience given the disappointing start to the year for those stocks.1 Some of these ETFs even offer leveraged exposure, amplifying gains when the stocks go up but, as would be the case in 2025, deepening losses when those stocks decline.2
Single stocks tend to be more volatile than a broadly diversified portfolio. The 20th percentile return outcome in a single year for all US stocks, when viewed individually, was historically –29.4%. That’s 22 percentage points worse than the 20th percentile year for the S&P 500 Index, at –7.4%. The hole dug by the single-stock outcome requires a far greater surge to overcome: a 41.7% return to recover the initial loss, compared to just 7.9% to make up for the broad market’s decline.
Adding 2x leverage to the 20th percentile single-stock outcome doubles the trouble. The –29.4% drop would have become –58.8%, requiring a whopping 143% return to claw back the loss.
These scenarios show why broad diversification can help provide more reliable outcomes over time. A global equity market allocation includes potentially thousands of stocks, mitigating the impact any individual security can exert on one’s portfolio.
EXHIBIT 1
Returns and Loss Recovery Following 20th Percentile Calendar Year Outcomes
Footnotes
1. The “Magnificent 7” are defined as Amazon, Tesla, Apple, Alphabet, NVIDIA, Meta Platforms, and Microsoft. This information is intended for educational purposes and should not be considered a recommendation to buy or sell a particular security. Named securities may be held in accounts managed by Dimensional.
2. Leverage is using borrowed money to increase potential investment profits. These profits aim to come from the difference between the investment returns on the borrowed money and the cost of the associated interest. Leverage can compound gains and can also compound losses.
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