Betting on a single stock can be a risky strategy
— -- Q: Investing isn't hard. Just pick a stock that's good year after year, like Coca-Cola ko, right?
A: Sounds pretty easy, right? Just buy a "good stock" and hold on. Everything should be fine.
And looking back in hindsight, picking just the right stock at the right time is amazingly simple. Take your Coca-Cola ko example. Shares of Coca-Cola have outperformed the leading Standard & Poor's 500 index fund spy eight of the past 12 years. What's more, Coca-Cola's current dividend yield is 2.8%, outstripping the 2.0% yield of the most-popular S&P 500 exchange-traded fund.
You can see the relative performance of Coca-Cola 's yearly stock change versus the S&P 500 ETF yearly price change:
• 2000: Coca-Cola (4.6%), S&P ETF ( -10.7%)
• 2001: Coca-Cola (-22.6%), S&P ETF (-12.9%)
• 2002: Coca-Cola (-7.0%), S&P ETF (-22.8%)
• 2003: Coca-Cola (15.8%), S&P ETF (26.1%)
• 2004: Coca-Cola (-18%), S&P ETF (8.6%)
• 2005: Coca-Cola (-3.2%), S&P ETF (3.0%)
• 2006: Coca-Cola (19.7%), S&P ETF (13.7%)
• 2007: Coca-Cola (27.2%), S&P ETF (3.2%)
• 2008: Coca-Cola (-26.2%), S&P ETF (-38.3%)
• 2009: Coca-Cola (25.9%), S&P ETF (23.5%)
• 2010: Coca-Cola (15.4%), S&P ETF (12.8%)
• 2011: Coca-Cola (6.4%), S&P ETF (0%)
Source: USA TODAY analysis of data from S&P's Capital IQ
It's hard to argue with such a consistent track record. And the stable earnings and growth at Coca-Cola is most likely one of the things that attracts famed investor Warren Buffett to the stock.
Clearly, in hindsight, the bet would have worked out and investors would have earned more money than investing in the S&P 500. However, it's still not a sound strategy. Why not?
First of all, owning shares of a single stock is riskier than owning the broad stock market. This risk is invisible when things are rosy. Coca-Cola shares are exposed to risks unique to Coke and the beverage industry. If Coca-Cola runs into trouble, investors pay the price. And despite this added risk, which was there, investors weren't rewarded by much more.
To show you how investors endured extra risk, and got little in return, look at how a $10,000 investment would have done starting in 2000. While Coca-Cola shares have been consistent, over time, that consistency hasn't produced vastly superior returns. That $10,000 initial investment in 2000 would have been worth $10,035 today. Had the same investor bet on the S&P 500, the initial $10,000 investment would have been worth $10,030. An extra $5 in return is hardly worth the extra risk taken betting on just one stock.
Consider this, too. At the worst point for the stock since 2000, investors would have seen the value of their investment fall to as low as $9,975 with Coke, while the lowest point with the S&P 500 would have been $9,980.
There are other factors to consider when looking at a stock like Coca-Cola, especially that past returns don't predict future returns. While Coca-Cola did well since 2000, there's no way to know whether that run will continue. If there's a disruption to the operations of Coca-Cola, investors are exposed to great risk. However, by spreading their money over 499 other companies, the risk of troubles at any one company are greatly reduced.
Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Follow Matt on Twitter at: twitter.com/mattkrantz