Here's a startling fact: Nearly three-fourths of S&P 500 stocks are high risk. That's according to a recent table in Fortune that measures risk "on the ability to achieve long-term stable earnings growth."
What's more, that number is up substantially from 20 years ago, when just one-third of S&P 500 stocks were considered "high risk."
More risk, less reward
While the conventional wisdom says more risk means more reward, this hasn't been the case for the S&P. The stocks are riskier, and the returns are worse. While the S&P 500 returned 12% per year from September 1985 to September 1995, it's returned a measly 6.9% per year over the past 10.
What's happening here?
Large companies are discovering that their once-exemplary business models no longer work in a global economy enabled by the World Wide Web. Formerly monopolistic credit card companies such as MasterCard
It's a new world order out there, and once-stable economic giants are struggling -- yes, struggling -- to keep up.
What's an investor to do?
If S&P 500 companies are riskier than ever before, then what's the point of buying those shares? After all, the returns of larger companies are limited by their size, and it takes a whole lot more than one or two disruptive innovations to put a dent in their bottom lines.
If investors are going to be subjected to more risk, they better have the potential to earn mind-blowing returns.
Buy tomorrow's great growth companies today
So instead of waiting for innovations to disrupt the companies you own, buy shares of the innovators before they go mainstream. That's the strategy employed by Motley Fool co-founder David Gardner and his team of analysts at Motley Fool Rule Breakers. Their hypothesis -- and I think it's a good one -- is that by focusing on innovative businesses in their early stages, they can find tomorrow's great ideas a day early and earn great returns in the process.
Sure, there's some risk and uncertainty in this model. But there's also the chance at incredible returns -- like the three-bagger Rule Breakers earned in a year by recommending electronic stock exchange Archipelago before it was acquired by NYSE Group.
What do you get for the risk and uncertainty baked into today's S&P 500? If past is prologue, about 7% per year. We think you can do better.
If you would like more information about our Motley Fool Rule Breakers investing service, please click here. There is no obligation to subscribe.
Tim Hanson does not own shares of any company mentioned in this article. Yahoo!, Disney, and eBay are Motley Fool Stock Advisor recommendations. MasterCard is an Inside Value recommendation. No Fool is too cool for disclosure.
