Why Is Everyone Talking About the S&P 500?

I’ve been talking to a number of you about the S&P 500 and an S&P 500 index fund. I thought I’d put together a series of articles on the S&P 500, S&P 500 index funds, why they are popular for long term investments like a retirement account, and why Warren Buffet's will leaves his wife money allocated 90% in the Standard & Poor's 500.

What is the S&P 500?

The S&P 500 index, or Standard & Poor's 500 index, is a list of the 500 leading publicly traded companies in the U.S. The S&P 500 index is regarded as one of the best gauges of prominent American equities' performance, and by extension, that of the stock market overall.

What are the largest companies in the S&P 500 by weight?

Apple (AAPL): 7.49%

Microsoft (MSFT): 6.95%

Amazon (AMZN): 3.08%

NVIDIA (NVDA): 2.69%

Alphabet Class A (GOOGL): 2.07%

Alphabet Class C (GOOG): 1.81%

Meta (META), formerly Facebook, Class A: 1.69%

Berkshire Hathaway (BRK.B): 1.65%

Tesla (TSLA): 1.60%

UnitedHealth Group (UNH): 1.30%

What is an S&P 500 Index fund?

An index fund is designed to mirror the performance of a stock index. An S&P 500 index fund invests in each of the 500 companies in the S&P 500. It doesn't try to outperform the index. Instead, it uses the index as its benchmark and aims to replicate its performance as closely as possible.

Why are S&P 500 index funds popular?

S&P 500 funds are by far the most popular type of index fund. But index funds can be based on practically any financial market, investing strategy, or stock market sector.

Index funds are popular with investors for a number of reasons. They offer easy portfolio diversification, with some funds providing broad exposure to hundreds or even thousands of stocks and bonds. You don't risk losing all your money if one company collapses, like you could with individual investments. However, you also don't have as much upside potential to the astronomical returns that can result from picking a single huge winner.

Index funds are passively managed, which means you're not paying for someone to actively pick and choose investments. Passively managed funds result in a lower expense ratio from lower investment management fees compared to actively managed funds.

• Your money will track the market's performance. Historically, the S&P 500's annual returns have been in the 9% to 10% range. In some years, the index will lose value. For example, during the Great Recession, the S&P 500 lost about half of its value. Beginning in early 2022, the index experienced a bear market. As of March 14, 2023, the S&P 500 was down more than 6% over the past year. But over the long term, it's always recovered.

• You keep more of your investment profits in your pocket. S&P 500 index funds are low-cost investments. While active managers are likely to match or even beat the market's performance over time, their fees eat away at your returns. Because they're passive investments with low fees, S&P 500 index funds deliver returns that mirror the index's returns over the long term.

• You're investing in 500 of the most profitable companies in the U.S. The corporations represented in the S&P 500 are subject to stringent listing criteria. To join the index, a company must have a $12.7 billion market capitalization, and the sum of its past four quarters' earnings must be positive. Each company must also get approval from an index committee.

• You can put your investment decisions on autopilot. You also don't have to research or follow individual companies. You can simply budget a certain amount and automatically invest it on a regular schedule. This practice is known as dollar-cost averaging.

• Many mutual fund companies offer S&P 500 low cost index funds.

Keep in mind that historical performance is no guarantee of future returns, and the historical return range is not intended as investment advice or as a guarantee of the performance of investment opportunities.

NOT FINANCIAL ADVICE

The information contained in this article is for informational purposes only and shall not be understood or construed as financial advice. I am not an attorney, accountant, or financial advisor, nor am I holding myself out to be. I do not accept any fees or commissions from anyone or any financial institution. 

I’d love any feedback on these articles.