The Buy-and-Forget Strategy

One of my favorite financial writers, Morgan Housel, highlights some facts about buy-and-forget investing:

Since its beginning in 1957, almost 1,000 companies have been removed from the index, and another 1,000 new companies added.

Siegel calculated how the index would have performed if, rather than replacing old companies with new ones, investors had just stuck with the original components, letting dying companies die and reinvesting proceeds from buyouts into the surviving S&P 500 companies.

It’s pretty amazing.

“Those who bought the original 500 firms and never sold any of them outperformed not only the world’s most famous benchmark stock index but also the performance of most money managers and actively managed equity funds,” Siegel writes.

The normal S&P 500 returned 10.3% a year from its 1957 founding through Dec. 2003.

But if you stuck with the original 500 components, letting dying companies die and reinvesting proceeds from companies that were bought out into the surviving companies (there were 125 of them left by 2003), you earned 11.3% a year.

That’s amazing. It also illustrates how dynamic the broader market can be. New companies are always coming into the index. On balance, I suppose the legacy companies are better investments.

Posted by on February 23rd, 2015 at 1:59 pm


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