All financial gurus starting from Warren Buffet to Humphrey Yang have large portions of this. It lays at the backbone of many investors’ portfolios because it provides diversification and growth.
S&P 500 is an index that tracks the performance of 500 largest US companies. In this article I’ll tell you how to invest in it, what advantages and disadvantages it has, and what are the alternatives to it, if you don’t want to hold 490 companies that you don’t know, but also not spend too much time stock-picking.
Why is the S&P 500 a good asset?
- Easy. You don’t need to spend hours researching stocks or comparing financial metrics, you just buy the whole market with this index. Like a box of chocolates with different flavours. Also, the composition is not fixed forever: companies come and go. For example, Tesla was added to the S&P in 2020 and kicked out Apartment Investment and Management. Fortunately for you, you won’t need to buy extra Tesla to maintain the same index, it’s automatically rebalanced.
- Good returns. Over the past 30 years, the S&P 500 index has delivered a compound average annual growth rate of 10.7% per year. It is the main benchmark for the rest of the market, and hedge fund managers try to outperform it (spoiler, unsuccessfully). Over a 20-year period, about 90% of index funds tracking companies of all sizes outperformed their active counterparts. Even over three years more than half of index funds did better, according to a 2020 report from the S&P Indices Versus Active (SPIVA).
- Safe and diverse. Stocks go up and down all the time, new policies and macroeconomics affect sectors of the economy differently. It’s a guessing game what’s going to rise next. Should you invest more in biotech or consumer staples? Will a recession happen next year? You’ll never know until it’s too late, so the safe way would be to invest in the S&P because while some sectors might fall, others will grow.
- Lower costs. Because there is less trading volume with passive investing, this brings the costs down for investors. The average expense ratio for passive mutual funds in 2020 was 0.06%; passive ETFs came in at 0.18% compared to range from .5% to 1.5% for actively managed funds.
Buying the S&P 500 is the epitome of passive investing. Passive investing is buying and holding stocks for a longer period of time. It’s like you bought an Apple share together with your first iPhone in 2014 and kept holding it. But you don’t even have to choose between Apple or Android, you buy both. Same here — you buy the whole market.
Despite how sweet it sounds, here is one big disadvantage in SP500. Dispersed returns and sensitivity to macro economic events. Let me give you an example. If you’ve invested in apple 5 years ago, you would've grown your capital by 187%, whereas with S&P it’s 41%.
Because all companies perform differently. There are trendier sectors like Technology and more lagging like Utilities. So if you want to grow more, you can also bet on more trendy and specific topics like 3D printing by investing in TTF.
How to invest in the S&P 500?
- The most expensive way. If you have a million dollars, you can just buy one stock of each company, but obviously that’s a lot of money and hassle - to have 500 individual companies in the portfolio is endless scrolling. You don’t want this.
- Buy S&P 500 ETFs in your brokerage accounts. An ETF is an exchange-traded fund, it’s like a basket of securities. The largest ones are SPDR S&P 500 ETF Trust, iShares Core S&P 500 ETF and Vanguard S&P 500 ETF.
- All 500 companies can be divided into 11 sectors based on size as follows: Information Technology, Health Care, Financials, Consumer Discretionary, Communication Services, Industrials, Consumer Staples, Energy, Utilities, Real Estate, and Materials. So if you want to have broad diversification but don’t want to invest in particular sectors, like Utilities or Materials, then you can buy the sectors you like as thematic ETFs. Such as Financial Select Sector SPDR (XLF) or Technology Select Sector SPDR Fund (XLK).
- Or even better, you can invest more precisely in what you believe in and what you want to support. Not just invest in the whole Technology sector and companies most of which you don’t know, but specifically in AR/VR technology, or specifically in Copper mining companies. This is available through TTFs, model portfolios of 10-15 stocks made by professionals. And you can buy them in Gainy in one-click.
To sum up, there is a saying
There is a way to get rich fast, there is a way to get rich for sure.
So buying S&P500 is a way to become rich for sure. And later you can accelerate your growth with investing in individual stocks, or ETFs, or thematic TTFs.
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