Investing money is really just an investment when you return what you have spent – so where better to start by choosing the largest and most profitable companies?
In blue-chip companies, or household-based brand names, it is easiest to invest through the popular index fund known as Standard and Poor’s 500, or S&P 500. It tracks the performance of the 500 largest companies by market value.
Index funds have become one of the most popular ways of investing thanks to their economical way of diversifying its holdings across broad sectors or industries. Purchasing one share of the S&P 500 index fund is equivalent to buying tiny shares of the top 500 blue chip companies in the United States in one transaction.
Let’s take a look at the S&P 500 – and the ways to invest in it.
What is the S&P 500?
The S&P 500 is a performance test measure for businesses with large market capitalization. The S&P 500 is a portfolio consisting of about 500 of the largest companies traded on the American Stock Exchange. This is one of the best-known indicators of the US economy.
This index is also weighted, meaning that the large stocks form a larger part of the portfolio. For example, the largest stock in the index at the moment is Apple, which accounts for about 6% of the S&P 500 index. The smallest stock belongs to News Corporation Class B, which is only .008% of the index. So Apple is about 777 times the weight of the smallest stock – but that does not mean it is small. News Corporation Class B has a market capitalization, or market capitalization of the company, of $ 14.3 billion.
With the S&P 500, you’ll get exposure to these companies as well as other well-known names like Coca-Cola, PayPal, Disney, Home Depot and Netflix.
How are stocks selected for the S&P 500?
Not every stock can be included in the S&P 500. To be selected, a company must be profitable for at least a year. This does not mean that a company can not lose money in the short term because of operating costs and market conditions, but it must record cumulative profit, i.e. profit over a longer period.
The company must also have a large market value, which is calculated as the share price multiplied by the number of shares existing in the shares – and more than 50% of these shares must be in the hands of the public, i.e. individual investors like you and me.
“Companies need to be public, very liquid, and have open shares that can be traded publicly. A committee chooses which companies will be included in a combination of about 500 companies included in the index,” Jalife explains.
Finally, companies must file financial statements for public review with the Securities and Exchange Commission (SEC), be domiciled in the U.S., and of course be listed on the U.S. Stock Exchange.
Long-term investment in the S&P 500
Two ways to invest in S&P 500 companies are through mutual funds or ETFs, both of which are index fund versions. An index fund allows investors to get exposure to multiple securities in a single investment.
“An advantage of investing in the S&P 500 index fund is the ability to try to adjust the performance of the companies included in the S&P 500,” says Tiffany and Laca, A financial advisor and a certified wealth management advisor b VFG Associates. “You can use a buy and hold strategy without having to actively monitor the stock market. You also get diversification because the index represents all the different sectors of the US stock market. But one downside is that it does not represent the global market.”
Jalife adds that it may consider another index fund that will give you exposure to small or growing companies, as the S&P 500 index fund focuses only on the 500 largest.
The best way to invest in S&P 500 companies is through an index fund, such as a mutual fund or ETF, which aims to match the performance of the S&P 500. You should consider investing separately in smaller companies for greater diversity.
Some of the largest index funds in the world are the S&P 500 funds. The second largest mutual fund in the world according to managed assets is the Fidelity 500 index fund (FXAIX), and the largest ETF in the world according to the same index is the iShares Core S&P 500 fund.
Almost all of the largest and most popular S&P 500 index funds are a great place for investors who want great exposure to the market without having to select or manage individual stocks. Especially if there is a low expense ratio, or commission, for these funds.
Because of their popularity, competition has brought index fund spending ratios to near zero, making S&P 500 funds a historically convenient and reliable long-term investment. It also made it incredibly easy to open an account and start investing, even – and especially for novice investors.
Annual returns of the S&P 500
Since its inception in 1926, the average annual return of the S&P 500 has been between 10% and 11%. This includes the period from 1926 and 1957 when the S&P was 90, which includes only 90 stocks. Since the adoption of 500 shares in 1957, the average annual return has historically been around 8%.
But that does not mean it is always smooth. “There are times when the market will be negative for a period of time,” says Jalife. “But the good times in the market more than make up for it. Over a long period of time a single-digit or double-digit return is to be expected.” A buying mentality will cause investors to go through the ups and downs of the market.
In 40 of the last 50 years, the S&P 500 has gained value, which is a great record. The market has maintained its share of declines and losses, but if you have a long horizon of a few decades before retirement, the S&P 500 has proven to be a profitable and safe investment.
Interest consists of an investment in the S&P 500
In any investment, the power of compound interest is what makes the heavy tasks over time. “A compound means making money on money you didn’t have before. When you have time to work for yourself, it will really make a difference over the years,” says Jalife.
Here is an example. If you only put $ 100 into the S&P 500 fund when it started in 1926, assuming a 10% annual return, you would have had over $ 855,999 today – that’s without adding another cent to the original $ 100 investment.
By the same token, let’s say you start investing $ 1,000 in the S&P 500 Index Fund. You plan to retire in 40 years and want to add $ 100 a month to your investments. You would retire with more than $ 604,000. Increase your donations to $ 200 a month, and retire a millionaire.
These gains are due to compound interest operating on your behalf. If you have several years to invest, the returns can add up to your advantage – and by and large. As with any investment, the most important things are to start as soon as possible and invest consistently as often as possible.