Chevron – Why Today’s Most Valuable Stocks Won’t Be Tomorrow’s
In 1980, energy accounted for 28.2 percent of the value of the 500 companies in the S&P 500 index. Forty years later, it accounts for only 2.3 percent. People who stuck to energy missed out on rising sectors like information technology, which now dominates at 27.6 percent of the value of these 500 companies.
Such changes aren’t new. According to Global Financial Data, in 1900, the railroad industry represented more than half of the value of U.S. stocks, down from 80 percent in 1850. Financial stocks dominated before the emergence of railroad stocks.
What this means for you
History teaches us that today’s most valuable companies are unlikely to be tomorrow’s, at least if we define tomorrow in terms of a decade or four. There will be future disruptions in industries similar to ones in the past, such as the shift from brick-and-mortar retailers to online shopping. Anybody knowing what those disruptions would be has a good shot of ending up richer than Jeff Bezos, CEO of Amazon, and Elon Musk, CEO of Tesla, the two richest people on the planet.
Unfortunately, we can’t know. But there is a pretty simple way to make sure you own tomorrow’s winners. All you need is a low-cost total stock market index fund which will own virtually every publicly held company based in the U.S. You can do the same with a total international stock index fund. Narrower index funds (even an S&P 500 index fund) won’t do it, as they can miss out on some of these stars of the future.
Change is inevitable. Though we can’t predict tomorrow’s winners, we can make sure that we own those winners and are not piling more and more money into yesterday’s dinosaurs.