One of the first questions many people ask me when they’re getting into investing is “Where should I start investing?” Nine times out of ten I reply with the answer “The S&P 500.” I know you’ve probably heard that answer a million times, and it’s true for good reason. The S&P 500 is widely known as one of the most legendary indexes of all time. It’s made up of 500 of the largest, most valuable, stable, and well-managed publicly traded companies in the U.S. But the praise for the S&P 500 goes beyond just talk.
There are solid, data-driven reasons why I consider it to be one of the most intelligent investment moves an investor can make for the long run.
What is the S&P 500?
The S&P 500 is an index of the top 500 publicly traded U.S. companies, based on market capitalization (company value). Some of the famous household names included in the index are Apple, Microsoft, Amazon, Nvidia, Google (Alphabet), Meta, Berkshire Hathaway, Johnson & Johnson, and JPMorgan Chase.
Combined, these 500 companies in the S&P 500 span sectors like technology, finance, healthcare, energy, consumer discretionary, and industrials. The S&P 500 has massive built-in diversification, so you’re not putting your money into just one sector or company. You’re investing in the backbone of the U.S. economy.
Historically Strong Long-Term Growth
Since its inception, the S&P 500 has returned about 10% annually, on average, before adjusting for inflation. So let’s say you invested $1,000 in the S&P 500 index in the 1980s and never touched it. Your $1,000 investment could be worth over $10,000 today. This is with zero active management and assuming you just re-invested any dividends paid by the companies in the index back into the index fund.
Market crashes, like the 2008 financial crisis or the 2020 pandemic, can make the index lose value in the short term. But over the long run, history has shown the index bounces back to eventually reach new all-time highs. It is one of the most reliable ways to build wealth over the long term.
History has shown that the S&P 500 is one of the most resilient indices in history.
S&P 500 Stays Strong through History
A major reason why I trust the S&P 500 is because of its staying power. The U.S. economy has seen recessions, wars, inflation, the dot-com bubble, 9/11, and even the pandemic. Despite this, the S&P 500 has survived and thrived. And the companies in the index have had to adapt, change, and reinvent themselves to keep growing. Here are some examples:
The 2008 Global Financial Crisis
The S&P 500 survived the 2008 financial crisis and went on to experience one of the longest bull markets in U.S. history.
COVID-19 Crash in March 2020
The S&P 500 index not only recovered after a pandemic-induced crash in March 2020, but it reached new highs in less than a year.
Proof of Quality
The companies in the S&P 500 are chosen using strict criteria including profitability, market cap, liquidity, and public float. This ensures the companies are financially healthy and well-managed. Investors in the S&P 500 also benefit from a quality filter of sorts. They don’t have to individually select each of the 500 companies. The S&P 500 committee takes care of that.
Easy Passive Investing
If you buy an S&P 500 ETF, such as SPY or VOO, you gain instant access to all 500 companies in the index. You can create a passive portfolio with the flip of a switch and no need to be a stock-picking genius. And that’s one of the most attractive features of investing in the S&P 500: simplicity. If you’re just starting out or don’t want to actively manage your portfolio, it’s an ideal choice.
Compound Interest Magic
If you invest in the S&P 500 and keep re-investing your dividends back into the index fund or ETF, you’ll take full advantage of compound interest. Those dividends will grow into their own portfolios over time, leading to a snowball effect. Patience, consistency, and time are the keys. Here is an example:
Suppose you invest $500 per month into an S&P 500 index fund. After 30 years, with an average annual return of 10%, your portfolio could be worth nearly $1.1 million. Now that’s the power of compounding.
American Giants Have Global Reach
Yes, the S&P 500 only tracks U.S.-based companies. But many of those are global giants that have a big presence and revenues coming from Europe, Asia, Latin America, and emerging markets. For example, companies like Apple, Amazon, and Microsoft derive significant portions of their sales from outside the U.S. By investing in the S&P 500, you get exposure to the global growth of the U.S. economy.
S&P 500 ETFs Have Lower Fees
Fee and expense ratios are the bane of investing. It’s one of the biggest factors that erode your investment returns over time. But S&P 500 ETFs have ultra-low expense ratios, like Vanguard’s VOO with a 0.03% expense ratio. That means more of your money is being compounded instead of being siphoned away for “advisory” services. Compared to actively managed funds, index funds are a much cheaper alternative.
The S&P 500 Has a Winning Track Record
Warren Buffett has famously said that most investors will be better off buying a low-cost S&P 500 index fund and holding it for the long term. In 2008, he even made a bet that an S&P 500 index fund would outperform a portfolio of actively-managed hedge funds over a ten-year period. He was right and won $1 million in the bet.
Buffett has also given instructions for the bulk of his estate to be invested in S&P 500 index funds. A Warren Buffett fan club member’s tip if there ever was one.
Conclusion
The S&P 500 is not a risk-free investment and may not be right for everyone. But after considering the decades of data, massive built-in diversification, historically strong returns, high-quality company filter, low fees, and solid staying power, the S&P 500 index is one of the best long-term investment opportunities for most people.
You don’t have to analyze individual stocks or worry about market timing. You don’t have to obsessively monitor your portfolio. Just be consistent, re-invest your dividends, and give it time. This is how real wealth is created. So yes, I not only think it’s a good idea, I think it’s one of the smartest financial moves you can make for your future self.
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