Investing your money can feel a bit like wandering through a dense forest, right? You know there are riches to be found, but there are just so many options that it’s tough to figure out where to start. There’s a whole world of stocks, bonds, mutual funds, and ETFs, and navigating it all can feel pretty overwhelming.
So, you might think, “Why not hire a guide?” That’s where financial managers come in. They’re like the experts who help you navigate this investing wilderness. But keep in mind, they charge for their services, often a slice of the money they manage for you.
For some people, it’s worth it. They’d rather pay a bit for a professional to handle the tricky stuff. But with modern technology, managing your own investments is easier and cheaper than ever. You can be the captain of your own financial ship.
But where to set sail? A great starting point is the S&P 500.
The S&P 500 is like a big shopping basket, but instead of groceries, it’s filled with shares from 500 of the largest companies in the U.S. This group of stocks, known as an index, was started in 1957 by a company called Standard & Poor’s – hence the “S&P” in the name.
Here’s the cool part: over the last ten years, this basket of stocks has returned about 10% per year after accounting for dividends and taxes. That’s a solid return for simply buying into a big slice of America’s top companies.
If you’re looking to dip your toe into the investing pool, the S&P 500 might just be the perfect place to start. You’ll get broad exposure to the market without needing to become a stock expert overnight. How’s that for a smart investment?
How Market Indexes Works
You know when you’re making a smoothie, and you add more of your favorite fruit to make sure the flavor stands out? Well, the S&P 500 does something similar with companies.
The S&P 500 is what’s called a “market-cap-weighted” index. Imagine it as a giant smoothie blend of the 500 most valuable companies in the U.S. However, it doesn’t mix all companies equally. The most valuable company gets the largest share of the blend, the second most valuable gets a bit less, and so on. Just like adding more of your favorite fruit, the bigger companies have a bigger influence on the taste of the blend.
Now, there’s another type of mix called an “equal-weighted” index, where every company, big or small, gets an equal slice of the blend. It doesn’t matter if one company is worth double the other; they both get the same share.
For instance, if we have two companies, one valued at $200 billion and the other at $100 billion, the total value would be $300 billion. An equal-weighted index would divide this total equally so that each company would represent half of the total, regardless of size.
On the other hand, a market-cap-weighted index, like the S&P 500, adjusts the blend according to the company’s size. In this case, the $200 billion company would represent about two-thirds of the blend, and the $100 billion company would represent about one-third.
This way of blending companies in the S&P 500 is like taking the pulse of the U.S. stock market. Because it covers around 80% of the market’s value, it provides a pretty good snapshot of what’s going on in the U.S. financial sector.
Next time you think about the S&P 500, just remember it’s a kind of financial smoothie, blending the top 500 companies according to their size and value.
Why Invest In The S&P 500 Index
Now that we’ve chatted about what the S&P 500 is and how it works, let’s answer the big question: why should you consider investing in it?
Firstly, the S&P 500 is a broad safety net for your money. Since it covers about 80% of the stock market, you’re spreading your risk across hundreds of companies, instead of betting on just one or two. So, if one company hits a rough patch, your entire investment isn’t going to tank.
Secondly, investing in the S&P 500 could save you money. You see, when you hire a financial manager, they usually charge a fee. And, if your manager loves trading stocks (what they call ‘active management’), you could also be paying for each trade. All these fees can eat away at your returns.
But here’s the kicker: most managers don’t consistently outperform the S&P 500. According to investment giant Vanguard, only about 37% of stock fund managers and 19% of bond fund managers managed to beat their benchmarks over the past 15 years. Plus, more trading could mean you pay more in taxes.
Investing in the S&P 500 provides a more straightforward, less expensive way to grow your money over time. However, just like any investment, it comes with its own risks, which we’ll discuss next. The key to smart investing is understanding both the potential gains and the risks.
Downsides Of Investing In The S&P 500 Index
As much as investing in the S&P 500 sounds like a sweet deal, it’s not all sunshine and rainbows. There are a few things you should know.
Firstly, while it’s great that the S&P 500 covers a large chunk of the stock market, this also means it’s directly affected by the ups and downs of the U.S. economy. In other words, if the stock market has a bad day, your investment in the S&P 500 will too. Now, history has shown that the stock market usually goes up in the long run, but there will be days, weeks, or even years when it doesn’t.
Secondly, yes, it’s true that most financial managers don’t consistently beat the S&P 500. But there are a few who do. If you can find one of these rare gems (who also doesn’t charge an arm and a leg), you might be better off giving them your money to manage. It’s not a decision to make lightly, though. Make sure you do your homework and understand their strategies and fees before you sign up.
The S&P 500 can be a great starting point for new investors or a solid choice for those who prefer a more “set it and forget it” approach. It offers a relatively safe, affordable, and simple way to grow your money over time. But like any investment, it’s not without risks. Always do your research and consider your financial goals before diving in.
Make The S&P 500 Part Of A Savvy Investment Strategy
Looking for a smart way to invest? Here’s a simple, stress-free game plan you might want to consider:
Step 1: Start by putting aside some savings.
Step 2: If you haven’t already, open an account with a bank or brokerage firm you trust and put your savings into this account.
Step 3: Use your savings to buy a piece of the S&P 500 index.
Step 4: Sit back, relax, and let your money do the work!
Okay, I might be simplifying things a bit, but not by much.
Adding the S&P 500 to your portfolio can help spread your risk across many companies with just one purchase if you’re an investor. Or, if you’re a financial pro looking to ensure your clients’ portfolios perform at least as well as the average market, adding the S&P 500 can help you do that.
While a return of almost 10% a year might not seem like a gold rush, it’s a steady and reliable growth rate. Trying to pick and choose individual stocks based on gut feelings or trends can be a risky game that might not pay off.
Investing is a marathon, not a sprint. Being ready for the market’s ups and downs is vital to long-term success. How much of the advice here you take to heart will depend on your financial goals, how much risk you’re comfortable with, and how much time you want to spend managing your investments. Including the S&P 500 in your investment strategy could be a valuable way to build and protect your wealth over time.
Recommended Books
Interested in learning more about the S&P 500, stock market indexes, or investing in general? Here are a few highly recommended books to pick up or listen to on Audible.
- “A Random Walk Down Wall Street” by Burton G. Malkiel – This is a classic investment book that offers a comprehensive introduction to investing, including an excellent discussion on index funds.
Buy on Amazon: “A Random Walk Down Wall Street” by Burton G. Malkiel
- “The Little Book of Common Sense Investing” by John C. Bogle – Written by the founder of Vanguard and the pioneer of index funds, this book explains why low-cost index investing is the smartest and easiest way for individuals to invest their money.
Buy on Amazon: “The Little Book of Common Sense Investing” by John C. Bogle
- “The Four Pillars of Investing” by William Bernstein – This book offers a deep dive into the world of investing and provides a holistic view of the stock market, including the importance of understanding history, psychology, and the mechanics of investing.
Buy on Amazon: “The Four Pillars of Investing” by William Bernstein
- “The Intelligent Investor” by Benjamin Graham – A classic in the field of investing. While it covers a wide range of investing approaches, its principles of a disciplined, rational approach to investing remain sound.
Buy on Amazon: “The Intelligent Investor” by Benjamin Graham
- “Common Stocks and Uncommon Profits” by Philip Fisher – This book explains the author’s philosophy of investing and his focus on the long-term potential of a business, making it relevant to those interested in index investing.
Buy on Amazon: “Common Stocks and Uncommon Profits” by Philip Fisher
- “The Bogleheads’ Guide to Investing” by Taylor Larimore, Mel Lindauer, and Michael LeBoeuf – Bogleheads are followers of John Bogle, and their guide to investing provides a simple approach to the system that Bogle himself espouses.
Investing always involves risk, so it’s important to do your research, understand your risk tolerance, and potentially seek professional advice if needed. These books are all excellent resources to help educate yourself about investing in the S&P 500 and more.
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Disclaimer: This article reflects the author’s opinion and is not financial advice. WellEducatedMillennial.com is not a licensed financial advisor. Content is for informational purposes only. Consult a qualified financial professional before making investment decisions.
This post may contain affiliate links, which means I may receive a commission if you click a link and make a purchase. However, my opinions and recommendations remain my own, uninfluenced by any potential earnings.
Sources
S&P 500®. S&P Dow Jones Indices. (n.d.). Retrieved March 20, 2022, from https://www.spglobal.com/spdji/en/indices/equity/sp-500/#overview
Index funds vs. actively managed funds. Vanguard. (n.d.). Retrieved March 20, 2022, from https://investor.vanguard.com/investor-resources-education/understanding-investment-types/index-funds-vs-actively-managed-funds#modal-performance
Fernando, J. (2022, February 8). The capital gains tax and how to calculate it. Investopedia. Retrieved March 20, 2022, from https://www.investopedia.com/terms/c/capital_gains_tax.asp
