Since 1980, The S&P 500 Has Dumped 320 Stocks Because They Stunk
The S&P 500 is probably the most popular benchmark against which stock market investors measure themselves.
For many investors, the best bet has been to put their money in an index fund that tracks the S&P 500 and just let it ride. However, buying and holding an S&P 500 index fund is very different from buying and holding the 500 companies that make up the index. For many reasons.
One key reason is that the S&P 500 experiences quite a bit of turnover. Names are added and deleted regularly.
"To be clear, not every S&P 500 deletion was the result of a 'problem stock'," wrote JP Morgan Asset Management's Michael Cembalest in September. "Actually, most deleted companies were not the result of a problem, and reflect benign index removals because: they were acquired at a premium to their current price; they merged with other companies in the index; or, they reincorporated outside the US."
This is not to say there haven't been a lot of S&P 500 distressed business "problem stocks," which Cembalest characterized as "the S&P 500 deletions that were a consequence of stocks that failed outright, were removed due to substantial declines in their market value, or were acquired after suffering such a decline."
"Since 1980, over 320 companies were deleted from the S&P 500 for business distress reasons, which implies a lot of turnover," Cembalest wrote. "This should not be a surprise: capitalism is based on competition, creative destruction and reinvention."
Investing in an S&P 500 index fund is characterized as passive investing. However, "passive" is a bit of a mischaracterization as the index is much more active than not.
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