Picture a portfolio bought once, in the year a famous index was born, then left alone through every boom, crash, and fashion. No trading, no tweaking, no ticker watching. A finance professor asked what such a portfolio would look like decades later, and the answer embarrassed the professionals who trade for a living. What he found changes how the word “passive” should be heard.
In March 1957, the S&P 500 was born, and ETFs did not exist: the first U.S. ETF, SPY, arrived on January 22, 1993. Owning the market meant buying every stock, and the index added about 20 new firms a year, 917 in all through 2003. So what if someone bought the original list and just stopped? Jeremy Siegel and Jeremy Schwartz answered in “Long-Term Returns on the Original S&P 500 Companies,” published in the Financial Analysts Journal.
The Three Portfolios That Time Built
Survivors Portfolio (SP): Only original firms that stayed intact. Shares received in mergers were sold and reinvested in the remaining survivors.
Direct Descendants Portfolio (DDP): The survivors plus shares of firms that absorbed original members.
Total Descendants Portfolio (TDP): Everything in the DDP plus every spinoff, never sold.
What Happened to the Companies?
By the end of 2003, the original 500 had been reduced to 339 through mergers, bankruptcies, nationalizations, and privatizations. Of the original 500, 125 survived intact and 74 were privatized, while just 11 descendants were in bankruptcy proceedings. Sticking with the original list was not the disaster that intuition predicts.
The Big Winner: Passive Holding
From March 1957 through 2003, the S&P 500 returned 10.85% a year. The survivors returned 11.31%, the direct descendants 11.35%, and the most passive portfolio, the TDP, 11.40%. The TDP required fewer transactions than an index fund, since no shares were sold in the open market, and with very few exceptions no capital gains were realized.
Tesla shows the opposite approach. It joined the S&P 500 in December 2020 after soaring 700% that year, and index funds bought $90.3 billion of its shares. It fell 6.5% to $649.86 on its first day in the index.
Why Buy-and-Hold Beat the Index
Less Trading = More Profit: No shares sold meant fewer costs and taxes.
No Survivorship Bias: The portfolios followed fixed rules, with no advance knowledge of winners. Standard Oil of New Jersey became Exxon in 1972 and Exxon-Mobil in 1999, returning 12.55% a year.
No Overpaying for Popularity: The authors blamed the index’s lag on overvalued new members, driven by investor sentiment and price pressure from indexers.
No Rule Changes: In 1976, the S&P added 40 financial stocks, and in July 2002, it removed foreign companies.
Lessons for Today’s Investors
Stick to Quality: Eighteen of the 20 best-performing survivors were pharmaceutical and consumer staples firms with strong brands. Colgate-Palmolive (CL) has since raised its dividend every year for 63 years.
Don’t Overtrade: Every trade carries costs, taxes, and the risk of buying high.
Focus on Dividends: Since 1960, 85% of the S&P 500’s cumulative total return can be attributed to reinvested dividends and compounding.
The Power of Doing Nothing
The original 500 beat the continually updated index with lower risk. The next time a tweak tempts, the lesson from 1957 is that the quiet path can be the most profitable one, and it is a lot less stressful.
doing nothing for decades is easy to admire and hard to do in a red week. do you think most people fail at the buying or at the holding?