on July 25, 2023
Let me begin this post by saying yes, I do trust the S&P (Standard & Poor’s) 500 Index (with a certain amount of caution, of course). But why? Why is this index an excellent example of basic, reliable investing? I’ll dive into my thoughts on the S&P, but first let’s go back to basics…
What is an Index/Index Fund?
An index refers to a group of stocks or other investments that are used to track the performance of a specific sector or market. An index fund is a type of mutual fund or exchange-traded fund (ETF) that is designed to track the performance of a particular market index, such as the S&P 500.
Index funds are known for being low-cost and for diversifying investments across a wide range of assets. They are also characterized by their passive management style, as they simply aim to match the performance of the index they are tracking rather than attempting to beat it. This can make index funds a good choice for investors who are looking for a more hands-off approach to investing.
What is the S&P 500?
The S&P 500 is a market index that tracks the stock performance of the top 500 publicly traded companies in the US. It includes companies from various industries, such as technology, healthcare, finance, and energy—companies that are at the top of the list in terms of profitability, market share, and trading volume.
Another popular index is the Dow Jones Industrial Average (the Dow), which has its advantages but is not as diversified as the S&P 500 (tracking 30 stocks instead of 500).
The Advantages of the S&P 500
One huge advantage of the S&P 500 is its low barrier to entry. It doesn’t cost much to buy into this index, and it does not demand an active investment style. In fact, many financial experts recommend it as one of the best ways to invest for beginners.
Another key strength of the S&P 500 is its diversity and low risk (keep in mind, when it comes to investing, there’s always some risk). When you invest in the S&P 500, you are essentially taking a bet on 500 excellent companies. In my experience, that’s not much of a gamble! This is the principle of not “putting all your eggs in one basket.” Instead, you’re spreading your wealth over 500 “baskets.” So, if one happens to fail miserably, you still have 499 pots of money to fall back on.
And this high performance isn’t just hypothetical. The S&P 500 has a stellar track record, delivering an average annual return of about 10.5% over the past 65 years. Of course, the S&P is subject to market risk, volatility, and fluctuations, just like any other investment. But, considering its past performance and diversity, this is often a risk worth taking.
But don’t just take my word for it! Many other financial advisors and big-name investors are proponents of the S&P 500. When billionaire Warren Buffett was asked about investing in index funds by CNBC, he said he’s had a “tough time” trying to beat the S&P 500. He also commented on the reliability of the S&P index, predicting that it would outperform 30-year bonds over the next three decades.
Investing is never risk-free. However, it’s possible to avoid some of the potential pitfalls by making wise choices, such as investing in diverse indexes with an excellent track record, like the S&P 500. Over the years, I’ve seen a lot of investment fads come and go, but index funds (while not exactly exciting) are steady and reliable. And oftentimes that’s what wins the race.