Investing in the S&P 500 is one of the best ways for beginner investors to put their money in the stock market. The stock index offers an easy way to invest in the 500 biggest companies in the US. While there will always be up and down years in the stock market, the S&P 500 has a decades-long history of performance.
In this guide, we’ll explain what the S&P 500 is, why it’s worth investing in, and of course, how to invest in the S&P 500.
What Is The S&P 500?
The S&P 500 is a stock index containing the 500 largest publicly-traded companies in the US. The index was first formed by Standard & Poor in 1957.
Although the S&P 500 includes 500 different companies, they are not all represented equally. The makeup of the index is weighted by market cap such that a company with a $100 billion valuation will have twice the presence in the index as a company with a $50 billion valuation. So, Apple, Microsoft, and Amazon, which all have market caps over $1 trillion, together make up nearly 15% of the index.
Why Invest In The S&P 500?
There are a couple reasons why the S&P 500 is such a popular investment among beginner and expert investors alike.
First, this index is the gold standard for stock market performance. The S&P 500 has returned over 12% per year on average for the past decade and over 8% per year since its inception in 1957. When professional investors talk about trying to beat the market, the S&P 500’s performance is what they’re really trying to beat. The truth is that even most professional investors cannot consistently generate better returns than the S&P 500 year in and year out.
Another important reason to invest in the S&P 500 is that it provides instant diversification. If you invest in a single company, the performance of your investment is completely tied to the fate of that company. When you invest in the S&P 500, your investment performance depends on how 500 different companies are doing. Even if, say, the auto industry has a bad year, the S&P 500 index as a whole can still be buoyed by the tech sector.
So, investing in a large index like the S&P 500 reduces your risk to individual companies or market sectors. It’s worth keeping in mind, though, that this index still won’t protect you against stock market crashes or other events that impact the market as a whole.
Finally, investing in the S&P 500 is simple and cost-effective. Many brokers won’t charge a commission or fee when you invest in this or similar indices. The management fees that S&P 500 index funds charge are also extremely low compared to other types of stock market funds.
How To Invest In The S&P 500
The primary way to invest in the S&P 500 is through index funds, including exchange-traded funds (ETFs) and mutual funds. ETFs trade on the stock market just like stocks and don’t require a minimum investment. Mutual funds are available through individual brokers and sometimes have minimum investment requirements.
There are dozens of S&P 500 funds, all of which are virtually identical in composition and performance. Before you pick one, make sure to check how much a fund is charging in fees. Vanguard, which is known for low fees, charges 0.03% of your investment per year for its S&P 500 index ETF. Other S&P 500 index funds can charge up to 1% in fees.
Tips For Investing In The S&P 500
While investing in the S&P 500 can be simple, there are some important tips to keep in mind.
First, don’t invest money you can’t afford to lose. While the S&P 500 has a strong and consistent track record, the market does have some bad years. In addition, there’s no guarantee that the index will continue to produce steady 8% gains in the years ahead.
With that said, it’s important to keep your long-term goals in mind. If you’re saving for retirement, don’t worry about one down year in the market or pull your funds out during it. Short-term fluctuations won’t have a big impact on your long-term investment performance.
Another important thing to keep in mind is that you should reinvest your dividends. Many brokers will do this automatically on your behalf. But if yours doesn’t reinvest for you, make sure to do it once or twice a year. Reinvesting dividends allows you to build your position in the S&P 500 and leads to greater investment returns in the long run.
Similar Investments To The S&P 500
The S&P 500 isn’t the only stock index you can invest in. You can also invest in the NASDAQ, which includes all 3,300 companies that trade on the NASDAQ stock exchange. This exchange leans towards technology companies, although it represents a wide blend of companies just like the S&P 500 (and in fact includes a large number of companies that make up the S&P 500).
You can also get exposure to the S&P 500 and more by investing in total market funds. These aren’t restricted to just the 500 largest companies in the US stock market, but rather includes thousands of companies of all sizes. Total market funds include the S&P 500 as well as indices like the Russell 3000, which includes 3,000 small-cap stocks in the US.
Conclusion: Investing In The S&P 500
The S&P 500 is one of the most popular stock investments for beginners and professional investors alike. This index has produced a relatively reliable and strong performance for decades, making it a great option for long-term investing. In addition, investing in the S&P 500 through an ETF or mutual fund allows you to open a diversified stock portfolio in seconds.