Whether you're a novice or an experienced investor, you've definitely heard someone who invests in the S&P 500 say these things:
Just invest in an index fund.
Take into account these statements from multi-billionaire investor Warren Buffet:
In my opinion, the best thing for most individuals to do is to invest in the S&P 500 index fund.
Warren went a step farther, once wagering $1 million on an index fund outperforming a portfolio of hedge funds over the course of 10 years, against hedge fund manager Ted Seides.
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| What You Need to Know About S&P 500 Investing |
And he won
Does investing in the S&P 500 make sense for ALL investors, though? What if you enjoy selecting stocks? What if you're unsure if you should put all of your money in the stock market?
In order for you to make a better educated decision for YOUR portfolio, let's examine how the S&P 500 operates as well as the benefits and drawbacks of investing in the S&P 500.
The S&P 500: What Is It?
Standard & Poors, sometimes known as S&P, has been one of the most well-known financial institutions in the world for the past 150 years.
An index of around 500 large-cap US equities is known as the S&P 500. It serves as a popular benchmark for the performance of the US stock market. It is distinct from the Dow Jones index because a greater variety of tech and growth firms are included. Unlike the S&P 500, which has 500 equities, the Dow Jones has just 30.
It's interesting to note that despite the S&P 500's superior depiction of "stock market" performance, my financial planning customers consistently referred to the Dow Jones.
How's the Dow doing today? was a question I heard frequently.
However, the S&P is frequently mentioned while reading about the state of the market or listening to an expert on CNBC discuss it.
A key benchmark for US equities performance is the S&P 500. The performance of other US equities often mirrors that of the S&P 500.
S&P 500 Sectors of Industry
The S&P 500 has 11 sectors, and the following rankings are based on how much of the index each one represents:
- Information Technology (26.4%)
- Health Care (15.1%)
- Consumer Discretionary (11.7%)
- Financials (11.0%)
- Communication Services (8.1%)
- Industrials (7.9%)
- Consumer Staples (6.9%)
- Energy (4.5%)
- Utilities (3.1%)
- Real Estate (2.8%)
- Materials (2.5%)
What is necessary to be included in the S&P 500?
According to SPC Global, a business must fulfill the following requirements in order to be listed among the S&P 500:
- It must be headquartered in the United States.
- File financial statements with the SEC (10-K reports)
- Have a market cap above $8.2 billion.
- Have at least 50% of its float-adjusted shares outstanding listed on a US stock exchange.
- Be considered a “blue chip” company, meaning it must have stability and continuity of earnings and dividend payments.
- Not be in bankruptcy proceedings.
- It must have a market capitalization of at least $8.2 billion.
- It must be listed on the NYSE, Nasdaq, or Cboe BZX Exchange.
- It must have posted positive earnings in the most recent four quarters.
Crocs, ServiceNow, and Zoom Video Communications are some of the most recent additions.
The S&P 500's Top 10 Companies
- Apple Inc. (AAPL)
- Microsoft Corporation (MSFT)
- Amazon.com, Inc. (AMZN)
- Alphabet Inc. A (GOOGL)
- Tesla, Inc. (TSLA)
- Berkshire Hathaway Inc. (BRK.B)
- Unitedhealth Group Inc (UNH)
- Alphabet Inc. C (GOOG)
- Exxon Mobil Corporation (XOM)
- Johnson & Johnson (JNJ)
The businesses fluctuate frequently, but these 10 have been largely stable over the previous five years. Tech firms include Apple, Amazon, and Google (Alphabet). The S&P 500 index is mostly composed of these three corporations. They really account for around 22% of the overall index as of October 2019!
The S&P 500 Investing Process
The S&P 500 can be purchased in a variety of ways. Individual equities, index funds, exchange-traded funds (ETFs), and even your own M1 Finance index fund (I'll discuss that later) may all be purchased.
Purchase individual equities: Buying individual stocks is perhaps the trickiest way to invest in the S&P 500. In addition to having a sizable number of money to invest, you also need to be knowledgeable about which stocks to buy. And there is no assurance that your investments will do well, even if you pick the appropriate stocks.
Invest in an index fund: An index fund is a kind of mutual fund that seeks to mimic the performance of a particular market index, such the S&P 500. A wonderful approach to invest in the stock market is through index funds since they provide diversity and expert management.
The S&P 500's top three mutual funds by size are:
- Admiral Shares in the Vanguard 500 Index Fund (VFIAX)
- Institutional Plus Shares of the Vanguard Institutional Index Fund (VINIX)
- S&P 500 Index Fund by Schwab (SWPPX)
A sort of investment vehicle that monitors the performance of a certain asset or collection of assets is an exchange-traded fund, or ETF. ETFs offer diversity and expert management, just like index funds do.
These are the top 3 S&P 500 ETFs:
- SPDR S&P 500 ETF (SPY)
- iShares Core S&P 500 ETF (IVV)
- Vanguard S&P 500 ETF (VOO)
Don't invest in the S&P 500 if you can't manage the ups and downs of the stock market.
S&P 500 Investments: Are They Worth It?
This question doesn't have a simple solution. Your objectives, risk tolerance, and time horizon all factor into this. Investing in the S&P 500 could be a smart move if you're looking to make long-term investments and can handle some volatility. Don't purchase the S&P 500, though, if you're looking for quick returns or can't handle the ups and downs of the stock market.
Advantages of S&P 500 Investing:
Diversification: By purchasing shares in the S&P 500, you are acquiring a portion of each of the 500 firms. If one particular firm underperforms, your diversity might help shield you from losses. Additionally, you may benefit from general US economic diversification since the index includes 11 distinct industrial sectors and almost 80% of the total capitalization of all US stock markets.
Professional management: Professionals who are experienced in stock selection and asset allocation manage index funds and ETFs, which removes much of the uncertainty associated with investing for many investors.
Low cost: Since S&P funds follow the index, little to no active management is necessary. Fund managers can reduce expenses as a result. In contrast, the managers of actively managed mutual funds aim to outperform the benchmark.
The yearly expense ratio of an ETF, which is often less than 0.10%, will barely affect your overall results. This is comparable to the annual MERs of 1% to 2% levied by actively managed mutual funds.
Actively managed funds are outperformed by the S&P 500: The Index outperforms these funds by almost 80%.
S&P 500 index funds pay dividends: Since the index comprises the biggest American enterprises, many of them are long-standing businesses that consistently distribute dividends. Through the fund, the dividends are distributed to investors. For instance, the dividend yield of the Schwab S&P 500 Index Fund is 1.54%.
Performance: Between 1972 and 2021, the S&P 500 returned 9.4% year on average. And it turns out that the great majority of years result in positive returns!
Cons of S&P 500 Investments:
Volatility: The stock market has the potential to be erratic, which means your investment's value may rise and fall. This volatility might be a significant danger if you want to make short-term investments.
No guarantees of returns: Investing in the S&P 500 does not guarantee a profit; you might actually lose money.
There is no international diversity in the S&P 500 because it is solely invested in US-listed businesses. Neither established nor emerging markets are exposed abroad.
Only large-cap equities are included in the index, which includes the 500 biggest publicly listed US businesses. It offers no mid- and small-cap stock diversity.
Even though other indices have outperformed the S&P 500 recently, this isn't always the case. The S&P 500 doesn't always lead the market. In various market environments, other investment strategies, such as value investing and small-cap stocks, have outperformed.
Market capitalization weighting: The index itself is determined by the market weight of each component business, even though the S&P 500 represents the 500 largest publicly listed corporations in America. A disproportionate share of the index value is made up of the greatest market capitalization corporations. For instance, as of April 2022, the index's 10 biggest holdings accounted for around 30% of its total value. Just three or four of those top holdings' stock prices experiencing a significant decline could have a significantly negative impact on the index's performance as a whole.
In M1 Finance, create your index fund
You can simply build your own index fund with M1 Finance and invest in the S&P 500 with no commissions or management fees. Additionally, by reinvesting your dividends, you may increase your investment over time.
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| What You Need to Know About S&P 500 Investing |
Create a free account first to get started, then follow these instructions:
- From the list of indices, select the S&P 500.
- Decide the equities you wish to add to your fund. Depending on your objectives and risk tolerance, M1 Finance can choose the stocks for you or you can choose them yourself.
- Establish a recurring investing schedule to make monthly contributions to your fund.
Pies is a special type of investment vehicle used by M1 Finance. You may add up to 100 individual stocks and exchange-traded funds to these personalized portfolios.
With three or four separate S&P 500 index funds, you may hold the majority of your assets in one pie. You may build up multiple pies, concentrate on various indexes, or select your own unique stock holdings if you wish to diversify outside the S&P 500.
M1 Finance will oversee the management of your pies once you've created them. To keep goal allocations, periodic rebalancing is necessary. Additionally, there is no price for this service.
Although you don't need any money to register an account with M1 Finance, you will need at least $100 to start investing (or $500 for retirement accounts). Individual and joint taxable brokerage accounts, regular, Roth, rollover, and SEP IRAs, as well as trust and custodial accounts, are all options. Read our M1 Finance review to find out more.
Should You Create Your Own S&P 500 Index by Buying Individual Stocks?
Platforms like M1 Finance, Robinhood, and other alternatives provide a low-cost and easier option for you to make your own index fund, but it doesn't mean you should.
Even with cool rebalancing features, you still need to buy each of the 500 stocks individually.
You'll also need to replace the stock when it is dropped from the index and rebalance your portfolio after that.
It takes a lot of work and, in my opinion, doesn't offer enough potential upside.
Can't You Just Buy S&P 500 Stock?
Some financial advisers advise placing all or the majority of your assets in the S&P 500. The advice is frequently given to younger investors in particular.
According to the argument, you can afford to have a 100% or near to 100% investment in stocks since you'll have plenty of time to recoup even if the market declines.
Although I can see the justification for both suggestions, I can't say that I agree with them all.
Even if an asset or fund is performing very well, as the S&P 500 has for the most of the previous ten years, it is never a good idea to invest your whole portfolio in that one asset or fund.
However, there is no assurance that the pattern will hold.
Your portfolio should also contain positions in fixed-income securities such as cash and cash equivalents, corporate and government bonds, and cash. These positions will help you preserve liquidity, allowing you to expand your stock position following a significant market selloff while also reducing the negative effects of a stock market fall.
The best course of action may be to keep the majority of your stock holdings in the S&P 500 while diversifying into other stock industries, global markets, bonds, and cash.
Which Investment Strategy Is Best for the S&P 500?
I previously highlighted the three biggest mutual funds and ETFs that invest in the S&P 500 index. These are the biggest S&P 500 index funds, and as they are frequently included in professionally managed portfolios, they each represent a well-liked method of index investment.
The six funds are broken down into their key characteristics in the table below:
| Fund / Feature | Fund type | Minimum investment | Expense ratio | 1 Year Return | 5 Year Return | 10 Year Return |
| Vanguard 500 Index Fund Admiral Shares (VFIAX) | Mutual fund | $3,000 | 0.04% | -15.51% | 9.20% | 11.66% |
| Vanguard Institutional Index Fund Institutional Plus Shares (VINIX) | Mutual fund | $5 million (as the name implies, this fund is designed for institutions) | 0.04% | -15.50% | 9.21% | 11.67% |
| Schwab S&P 500 Index Fund (SWPPX) | Mutual fund | No minimum | 0.02% | -15.49% | 9.21% | 11.64% |
| SPDR S&P 500 ETF (SPY) | ETF | $1 for a fractional share | 0.945% | -15.53% | 9.09% | 11.56% |
| iShares Core S&P 500 ETF (IVV) | ETF | Not indicated | 0.03% | -15.50% | 9.20% | 11.66% |
| Vanguard S&P 500 ETF (VOO) | ETF | No minimum | 0.03% | -15.39% | 9.23% | 11.68% |
As you can see, the six funds are fairly comparable, particularly in terms of their performance over the past one, five, and 10 years. Aside from the SPY, each has an expenditure ratio that is significantly lower than 0.10%. The primary distinction is that the VFIAX requires a $3,000 minimum initial investment while the other four funds either have no minimum investment requirement or very low one.
Any of these funds would be a good choice for an S&P 500 investment, with the exception of VINIX, which has a $5 million minimum investment requirement.
Through the fund family (Vanguard, Schwab, SPDR, or iShares) or a discount broker, you can invest in any of these funds. Although brokers normally do not charge commissions when buying and selling ETFs, many do do so for mutual funds. As a result, if you're investing through a broker, you should choose ETFs.
What Return Does the S&P 500 Make Every Year?
Between 1972 and 2021, the S&P 500 returned an average of 9.4% a year. In those 50 years, the index generated gains in 40 of those years while suffering losses in the other 10.
The performance throughout the ten-year period from 2012 to 2021 has been even more remarkable. The S&P 500's yearly average return over that time period was close to 14.8%.
However, it's crucial to constantly keep in mind that these numbers are averages. Even while the return may average that over a decade or more, you shouldn't anticipate to make 9.4% in any one year. Expect years where the index will gain more than 20% or lose more than 20% along the way.
As a result, investing in the S&P 500 index is best done over the long term.
Final Thoughts on S&P 500 Investing
The S&P 500 has without a doubt become the preferred stock market investment. It ought to be the largest stock holding in your portfolio just for that reason. However, diversification must always be considered, so make sure to keep small holdings in other stock sectors, cash, and bonds.
