Index investing is boring, right? This seems especially true with the large cap indexes like the S&P 500, which includes big permanent, stable titans of the global economy. Not much changes from year to year, decade to decade.
Or does it? In fact, the S&P 500 added and deleted three stocks last yearâ€”Advanced Micro Devices, Raymond James, Inc. and Alexandria Real Estate Equities were included, replacing Urban Outfitters, Frontier Communications and First Solarâ€”and this was a normal year.
These small incremental changes can add up over time. Imagine if you had fallen asleep in 1955 owning equal shares of each company in the Fortune 500 (the S&P index didnâ€™t exist then) and awakened last year, whereupon you immediately checked your holdings. Youâ€™d be startled to realize that only 60 companies on todayâ€™s list were among the 500 companies on the 1955 one. Some were merged away, some fell in the ranks, and many name brands of the timeâ€”like Armstrong Rubber, Cone Mills, Hines Lumber, Pacific Vegetable Oil and Riegel Textileâ€”are distant memories.
The point here is that, long term, there is nothing especially stable about the hierarchy of large companies in the U.S. or global economy. We donâ€™t know which companies will be the major corporate titans of tomorrowâ€™s economy, just like nobody back in the 1950s could have predicted Facebook, Twitter, Apple Computer or Microsoft. This is exactly why we buy index funds or diversified portfolios. Nobody knows which individual companies will either rise from obscurity or become the next Pacific Vegetable Oil.
This article was written by an independent writer for Brewster Financial Planning LLC and is not intended as individualized legal or investment advice, and any opinions expressed are solely those of the writer. Past returns do not guarantee future returns.