The Index or the Dartboard? The S&P 500’s 2012 Performance by the Numbers
“Informed decision-making comes from a long tradition of guessing and then blaming others for inadequate results.”
Which would have been a better bet for you in 2012? Investing in the S&P 500 index or randomly picking one of the members of the index on the first trading day of the year and selling it on the last day?
The results for 2012 were surprisingly close.
Before you keep going, pick a side. At the end of this article, I want you to tell me in the comments what side you picked, and what percentage of stocks you thought would beat the average. We’ll see who came closest. No cheating and no after-reading mulligans!
First, I’ll tell you what I thought and my reasoning for why I thought what I did, and then we’ll look at what the numbers actually revealed for 2012.
My general assumptions in any given year are that only about 40% of stocks which comprise the Standard & Poor’s 500 index will outperform the actual S&P 500 average. The reason for this is that you can have stocks which do particularly well pulling up the averages, but a stock can only lose 100% of its value. Granted, the S&P 500 is a value-weighted index, meaning that Apple will have more weight in the index composition than, say, Gilead Pharmaceuticals, so if you had a bunch of the smaller cap stocks performing really well, they might not compensate for one of the giants taking a mighty tumble.
Furthermore, past research shows that, through 2008, 64% of stocks underperformed the Russell 3000 index in their lifetimes. There is some survivorship bias in comparing extant S&P 500 stocks versus lifetime performance in the Russell 3000 index, which is why I skewed the numbers slightly higher.
How close was I?
The Performance of the S&P 500 Stock Components by the Numbers
To continue reading this article, please click on the link below:
Jason Hull is a Fort Worth fee only, hourly financial planner who serves clients in Fort Worth, TX and Dallas, TX as well as serving clients nationwide.
<a href="https://plus.google.com/116275753988749274645/">Connect with Jason on Google+</a>
Hull Financial Planning is a Fort Worth, fee-only hourly financial advisor. The cities we serve in the Dallas-Fort Worth area include:
Arlington, Azle, Bedford, Benbrook, Blue Mound, Burleson, Colleyville, Crowley, Dalworthington Gardens, Edgecliff Village, Euless, Everman, Flower Mound, Forest Hill, Fort Worth, Grapevine, Grand Prairie, Haltom City, Haslet, Hurst, Keller, Kennedale, Lake Worth, Lakeside, Mansfield, Newark, North Richland Hills, Pantego, Pelican Bay, Rendon, Richland Hills, River Oaks, Saginaw, Sansom Park, Southlake, Trophy Club, Watauga, Westlake, Westover Hills, Westworth Village, and, White Settlement
Addison, Balch Springs, Cedar Hill, Carrollton, Cockrell Hill, Combine, Coppell, Dallas, DeSoto, Duncanville, Farmers Branch, Ferris, Garland, Glenn Heights, Grand Prairie, Grapevine, Highland Park, Hutchins, Irving, Lancaster, Lewisville, Mesquite, Ovilla, Richardson, Rowlett, Sachse, Sand Branch, Seagoville, Sunnyvale, University Park, Wilmer, and, Wylie
We also serve clients nationwide and can leverage technology to maintain our client contact and communication.
Hull Financial Planning, 2939 Crockett St. #315, Fort Worth TX 76107, (817)476-0584