One of mankind’s greatest gifts is our ability to question the status quo, challenge, and change. It is how progress has been made for centuries, and how we have overcome the shortcomings present in its environment and evolved to our present-day form. A capitalist society, through the operation of an institution such as the stock market, allows ordinary people to participate in this progress.
Why has S&P500 been going up over the past few decades? Inflation, population growth, and technology are obvious drivers of the index return, as society’s wealth increases over time.
A not-so-obvious driver? The mix of the 500 companies does not stay stagnant over time. As market structure and valuation change, companies are added and dropped, such that the 500 companies chosen constantly account for approximately 80% of the overall US market capitalization.
You can see the history of how industries represented by the S&P500 have changed through the research done by QAD. It is also telling that the average lifespan of each S&P500 company in the index has shortened considerably to its current 15 years, with the reduction accelerating in the past 10 years.
By the design of the index mechanic, through owning a share of the S&P500 index, one is effectively owning the 500 strongest companies that the US market offers at any one time. More importantly, one is in effect choosing to participate in the progress that humanity can offer, rather than being a mere observer.
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