Here's something that might surprise you: the S&P 500 isn't actually a static list of 500 companies frozen in time. It's more like a curated portfolio that's constantly being updated as companies rise, fall, merge, go private, or simply disappear.

According to Goldman Sachs strategist Ben Snider, who published research on this in early January, "On average, 20% of S&P 500 constituents turn over every five years." That's one out of every five companies being swapped out, replaced by new blood that's earned its way into the index.

Snider's research, which tracked this metric back to 1985, shows just how dynamic the composition of America's most famous stock index really is. And this isn't some trivial detail. It's actually fundamental to understanding how the stock market works.

The Relay Race That Never Ends

Think of the stock market as a relay race where the runners keep changing. At any given moment, certain stocks are carrying the market higher. Eventually, many of these leaders stumble and fade. But here's the magic: new stocks always emerge to grab the baton and keep pushing the index upward.

Consider the Magnificent 7 stocks that dominated headlines recently. Six of them were only added to the S&P 500 within the past 25 years. They weren't always the giants they are today.

As Sam Ro aptly put it: "The good news for investors is that S&P has done a pretty good job of capturing the winners while weeding out the losers, as reflected by the fact that the index continues to trend higher."

Why Beating the Market Is Brutally Hard

This constant turnover reveals why active stock picking is so incredibly difficult. It's not just about identifying which stocks to own. You also need to nail when to own them.

First, there's the selection problem. Historical data shows that market returns have been driven by a minority of stocks. That means when you pick a random stock, you're more likely to underperform than outperform. It's literally worse odds than a coin flip.

But even if you manage to identify a future winner, you're not done. You need to know when to buy in, and just as importantly, when to sell before that company starts lagging and dragging down your returns. And this timing challenge is getting harder, not easier. Companies are now spending less time in the S&P 500 than they used to, meaning the window for catching a winner's best years is shrinking.

The Case for Just Buying the Index

When you buy and hold an S&P 500 index fund, it's called passive investing because you're not making constant trading decisions. But here's the thing: you're actually benefiting from active curation happening behind the scenes. The index committee is continuously updating the roster, adding companies that have grown large enough to qualify and removing those that no longer meet the criteria.

You're holding a portfolio that's constantly evolving, adapting to market changes without requiring you to make those difficult timing decisions yourself. The S&P 500's long-term upward trend suggests that this process works remarkably well at capturing growth while shedding dead weight.

The companies inside the index may change, but the index itself keeps marching higher. That's not luck. That's the entire system working as designed.