Simple and Effective
There have been thousands of books written on investing, but the few dozen words that follow sum up most of what you really need to know about investing in the stock market:
Simple arithmetic suggests – and history confirms – that the leading strategy for investing in stocks is to own all of the nation’s publicly traded businesses, allowing you to capture the return these businesses generate in the form of dividends and earnings growth.
The simplest way to implement this strategy: buy a low-cost index fund that represents the broad US stock market. Then do nothing.
John Bogle, the founder of Vanguard, put it this way:
“Index funds make up for their lack of short-term excitement by their truly exciting long-term productivity… Thanks to the growth, productivity, resourcefulness, and innovation of our corporations, capitalism creates wealth, a positive sum game for its owners.”
A Word About Market Concentration
Much has been written about high concentrations in stock market indexes. Indeed, the 10 largest companies in the S&P 500 today make up over a third of the total index.
Let’s look back roughly 20 years ago to 2005, when the top 10 companies made up roughly 19% of the index. That list looked like this:
Top 10 S&P 500 Companies in 2005
| Exxon Mobil | Bank of America |
| Microsoft | Johnson & Johnson |
| Citigroup | Pfizer |
| General Electric | Intel |
| Walmart | AIG |
Now consider the fate of some of these companies.
AIG stock fell roughly 97% between 2007 and 2008 – and has yet to recover but a fraction of that.
Citigroup was much of the same, falling some 85% between 2007 and 2008. Its share price today sits at less than a quarter of what it was at its peak.
Bank of America and Pfizer have compounded at… wait for it… 2.28% and 3.85% per year, respectively, from 2005 through July 2025.
In fact, only two of those 10 companies matched or exceeded the return of the S&P 500 Index itself, while most of the others didn’t come close. That means a buy-and-hold investor who simply bought the index in 2005 would have outperformed eight of the top ten companies over the next 20 years, earning an annualized return of around 10.4%.
What does this tell us about indexing?
First, the leaders more than make up for the laggards over time.
Second, while market leaders drive returns, new or growing corporations contribute significantly as they rise within the index. By owning the entire market, the index is primed for capturing growth of emerging companies that contribute to this long-term market performance.
Looking backward, we can see that Microsoft contributed significantly to the market’s return over that 20-year period. The other nine leaders in 2005 were inconsequential by comparison, and were eventually replaced by faster-growing companies that came in to take the lead, further contributing to returns.
This is a feature, not a failure, of index investing.
Sources:
1. https://www.finhacker.cz/top-20-sp-500-companies-by-market-cap/#2005
2. www.portfoliovisualizer.com
3. www.morningstar.com