A version of this article first appeared on TKer.co
The stock market and broad market indices, such as the S&P 500, are not static.
The stocks that comprise the market are as companies grow, shrink, merge, privatize, or go bellyup.
“On average, 20% of S&P 500 constituents turn over every five years,” Goldman Sachs’ Ben Snider wrote in his Jan. 6 research note.
He shared this chart showing how this metric has evolved since 1985.
The S&P 500 experiences a lot of turnover. (Source: Goldman Sachs)
This phenomenon is critical to understanding why the stock market behaves as it does. (In fact, it’s .)
In any given period, there are stocks driving the overall market higher. And often, many of these market leaders . BUT other stocks always and extend the market’s .
As we discussed , six of the Magnificent 7 were only added to the S&P 500 over the past 25 years.
This turnover means it’s incredibly difficult to not only know which stocks to own, but also when to own them.
To that former point, we know that the market’s historical returns have been . In other words, : You’re more likely to underperform than outperform.
To that latter point, it’s not enough to know when to buy a . You also have to know when to sell before it starts to lag and drag on your returns. And these trades may be getting even harder to time as the .
Buying and holding an S&P 500 index fund is considered because it doesn’t require the investor to make many trades.
However, as history shows, this type of passive investing means the fund investor is holding a varying mix of stocks as companies regularly enter and leave the index.
The good news for investors is that S&P has done a pretty good job of capturing the winners while weeding out the losers, as reflected by the fact that the index continues to trend higher.
