Because the average company lifespan in the S&P 500 Index continues to decline, it is increasingly important for investors to have an investment strategy that isn’t trapped by yesterday’s assumptions
Does it seem like the pace of change seems to be accelerating as time goes on? Well, indeed it is when it comes to the average company lifespan in the S&P 500 Index (Source Innosight).
Imagine a world in which the average company lasted just 12 years on the S&P 500. That’s the reality we could be living in by 2027, according to Innosight’s biennial corporate longevity forecast.
There are a variety of reasons why companies drop off the list. They can be overtaken by a faster growing company and fall below the market cap size threshold (currently that cutoff is about $6 billion). Or they can enter into a merger, acquisition or buyout deal. At the current and forecasted turnover rate, the Innosight study shows that nearly 50% of the current S&P 500 will be replaced over the next ten years. This projection is consistent with our previous analysis from 2012 and 2016, which Innosight originally conducted with Creative Destruction author Richard Foster.
Over the past five years alone, the companies that have been displaced from the S&P list include many iconic corporations (Table 1).
By tracking all the additions and deletions from the S&P 500 over the past half century, our study shows that lifespans of companies tend to fluctuate in cycles that often mirror the state of the economy and reflect disruption from technologies, ranging from biotech breakthroughs to social media to cloud computing. Over time, the larger trendline is for average longevity to continue to slope downward.
My emphasis added. Although there are wide-ranging implications of this trend, there are some specific takeaways for active investors. First, the idea of investing in specific companies for the long-run is increasingly impossible even if you wanted to! Technological innovation, digital disruption, globalization and many other factors are at play here.
Does this have any implications for relative strength investors? Is there a need to use more sensitive relative strength signals going forward? I don’t think so; at least I haven’t seen that show up in any of the ongoing relative strength research that I consume. However, I think this trend of accelerating creative destruction does mean that active investors need to closely monitor their holdings. I think it does mean that if you have a client who buys a portfolio of stocks and plans to hold those positions for decades they may very well have a rude awakening when they look at the results. I think it does mean that investors need to have an investment strategy that isn’t trapped by yesterday’s assumptions. We are in a dynamic economic environment---having a data driven approach to monitoring your holdings may be increasing important in the years ahead.
The relative strength strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss.
