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Why Today's Most Valuable Stocks Won't Be Tomorrow's

Somewhere in your index fund is the Amazon of the future

spinner image signs from a building on wall street that show industry sector numbers
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Looking for something delivered free to your house? You'll probably use Amazon. Want a computer, mobile phone or tablet? Apple or Microsoft will probably make the device, run it, or both. Want to find out who Pepin the Short was? You'll need to Google that. (He was Charlemagne's father.)

spinner image Comparitive List of S&P 500 Market Sector Weightings 1980-2020
Notes: Pre-GICS, Industrials included Conglomerates, Miscellaneous and Transportation industries. Telecommunications Services consisted of only AT&T from 1970-1985; Communications Services today. Data as of 12/31 of each year listed. As of 12/31/20. GICS sector make-ups started with 1990 data.

The seemingly entrenched position of most valuable publicly held companies in America makes it easy to assume that these blue chips would be good investments. After all, what could possibly happen to behemoths like Apple, Microsoft, Amazon, Alphabet and other top companies in a world dominated by technology? The answer is plenty, and that's why you need to own a broad portfolio of stocks, preferably in an index fund. There's only one way to go when you're number one, and you never know who will be the next on top.

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Consider the 10 most valuable companies back in 1980 as well as in 2020. In 1980, I had recently graduated from college and started investing. Big Blue (IBM), Ma Bell (AT&T) and oil companies dominated the landscape. (In fact, AT&T was the only telephone company in the country.) I would soon enter graduate school, where my business school case studies celebrated the great management and the dominance of these companies. They had built barriers to entry in essential industries of the day, so much so it seemed unlikely that they would have any competition. The companies were so valuable that they were called blue chips, after the most valuable poker chips. It seemed like a safe bet to own them. Many expected to simply collect the dividends and watch the stock share prices rise.

Largest companies in the S&P 500

Ranked by market capitalization, which is share price multiplied by current price per share.

Fast-forward four decades and not a single one of these companies makes the top 10 list. Two of them merged (Exxon and Mobil) and, combined, don't make the top 30 most valuable U.S. companies. Standard Oil of Indiana became Amoco, which is now a part of British Petroleum (BP). Standard Oil of California changed its name to Chevron, merged with Texaco to become ChevronTexaco, but now is plain old Chevron. AT&T, broken up in 1984, now ranks as 30th-largest company in the U.S. General Electric, whose dividends and earnings once rose as reliably as the sun in the east, is the 75th-largest U.S. stock after slashing its dividend to a penny in 2018.

Top 10 S&P 500 companies (1980-2020)

Want to see how things change? This YouTube video compresses 40 years into just a little over three minutes.

Sam Stovall, chief investment strategist at the research firm CFRA, provided me with the following sector weightings of the S&P 500 over the last half century. The S&P 500 typically has the most valuable U.S. companies but sometimes misses out, such as not adding Tesla until December 2020.

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S&P 500 sector weightings through the decades

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.

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