RETURN BIASES IN STOCK INDEXES
Because stock indexes such as the S&P 500 Index constantly add new
firms and delete old ones, some investors believe that the return calcu-
lated from these indexes will be higher than the return that can be
achieved by investors in the overall market.
But this is not the case. It is true that the best-performing stocks will
stay in the S&P 500 Index, but this index misses the powerful upside
move of many small and mid-sized issues. For example, Microsoft was
not added to the S&P 500 Index until June 1994, eight years after going
public. While small stock indexes are the incubators of some of the great-
est growth stocks, they also contain those “fallen angels” that dropped
out of the large-cap indexes and are headed downward.
46 PART 1 The Verdict of History
FIGURE 3–2
CRSP Total Market Index (Value at $18.12 trillion in September 2007)