As of 2003, the average S&P 500 company was publicly traded for 25 years. Although the number's been steadily dropping in recent years, it's still an awfully long time. But how well have the biggest S&P 500 companies performed over the past quarter century?

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My Best Guess
The index itself is up 477% from July 31, 1985 to July 30, 2010. The best performer of the current crop is definitely Apple (Nasdaq:AAPL). A lot has happened to the technology innovator in the past 25 years including both the firing and rehiring of Steve Jobs, its current CEO. Investors are so familiar with the success of products like the iPhone, iPad and iPod; we tend to forget that it got its start as the alternative to PCs.

Its prolific development of products consumers actually want is the main reason its stock is up 14,113%. A $10,000 investment back in 1985 is worth about $1.4 million today. The same investment in the index is worth just $58,200.

Value of $10,000 Investment 1985-2010


$10,000 Investment Today

Exxon Mobil (NYSE:XOM)


Apple (Nasdaq:AAPL)


Procter & Gamble (NYSE:PG)




Johnson & Johnson (NYSE:JNJ)


S&P 500


An Obvious Conclusion
For me, the ideal portfolio involves 16 stocks with an equal number of micro-cap, small-cap, mid-cap and large-cap companies. Each stock should be profitable and financially sound. The holding period is forever. Changes are made only when a stock ceases trading, whether by acquisition, bankruptcy or some other event.

The evidence suggests that if the average S&P 500 stock trades for approximately 25 years, all you have to do is pick four that last a quarter of a century and there's an excellent chance of beating the index over this period. Furthermore, there's little doubt that the same approach with large caps applies to smaller stocks as well. In the end, what matters is how long you remain in the market.

The Peter Lynch Argument
The Fidelity Magellan fund achieved an annual return of 21.8% between 1981 and 1990. Investors in the popular fund made just 13.4%. How is it that the fund did so well but the investors didn't? Simple: market timing. Investors were buying and selling the fund instead of just holding it for the long term. Stocks work the same. If you missed the 10 best days in 2009 on the S&P 500, you lost 17% instead of the reported gain of 26.5%, which supports my belief about timing in the markets.

However, Invesco Aim produced a piece in April that shows performance over an 81-year period would be even better if you missed the 10 worst days in the market. It concluded that avoiding undue risk is the key to investing success. But looking more closely at the data, you'll see that the best course of action is to accept the up and down nature of investing and simply hold for the long-term. Those that were invested for both the 10 best and worst days in the market achieved a cumulative return of 4,418%.; decent, if not spectacular returns.

As the Fidelity Magellan example illustrates, there may be better returns available but often they're mighty elusive, especially if you practice market timing. (Learn more about Peter Lynch and Fidelity Magellan in The Greatest Investors: Peter Lynch.)

The Bottom Line
I would be curious to see the 25-year returns of S&P 500 stocks today versus 10, 20 and even 50 years ago. Given the lifespan of index companies back in 1957 when it was created were more than double what they are today, the returns would likely be significantly higher as longevity seems to translate into better performance.

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