Why the S&P 500 Is the Single Best Investment You Can Make

Adam

Written by Adam on June 7, 2020.
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The S&P 500

This circle represents the Standard & Poor 500, also known as the S&P 500.

An investment in the S&P 500 is an investment in 500 of the largest companies in the United States

Warren Buffett calls it the best investment in the world.

Let's look at why.

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The S&P 500 is an index.

An index is a blueprint for how to invest in a bunch of companies at once.

An investment in a S&P 500 index is equivalent to investing in 80% of the United States Stock Market.

With a single, investment, you're already hugely diversified!

This is #1 out of 5 reasons we'll go over for The S&P 500 is such a great investment:

Reason #1:

The S&P 500 allows you to invest in 500 companies making up 80% of the US Stock Market in a single investment.

500 Companies, 11 Sectors

The S&P 500 include businesses from many different sectors.

This include technology companies you may use every day like Microsoft, Apple and Google – 71 technology companies in total.

It includes consumer staple companies you may have in your home right now like Coca Cola, General Mills or Clorox.

Notice how the circles are different sizes? That's because The S&P 500 is a capitalization weighted index. technology companies

S&P 500 Sectors

In all the 500 companies are split into 11 different sectors:

  • Communication Services
  • Consumer Discretionary
  • Consumer Staples
  • Energy
  • Financials
  • Health Care
  • Industrials
  • Technology
  • Materials
  • Real Estate
  • Utilities

The S&P 500 is a capitalization weighted index. That's a fancy way of saying it invests more in companies with a large market cap and less in companies with a smaller market cap.

The Returns

In the last 100 years, the S&P has returned an inflation adjusted average growth of 7.8% a year an astounding return over any period.

This amount includes dividend - money returned and reinvested.

A investment over years would, on average, grow to .

Adam says: Any purple underlined numbers you see in this article are editable! Try changing them and see what happens.

Looking at its trend is a way of looking back in time. We can quickly see the drop in 1929 for The Great Depression followed by the recovery.

[Filter the chart to only show the time period from 1928 - 1950.]

We can see the dot com boom back in the year 2000 as well as the Great Recession starting in 2007.

[Filter the chart to only show the time period from 1995 - 2010].

For every recession and drop in the market, the S&P 500 has eventually recovered.

The S&P 500 had completed recovered from The Great Recession less than 5 years.

[ Filter for 2005 - today].

If you were to invest $100 in the S&P 500 today, about $5.67 of it would invest in Microsoft, the largest company listed in US stock markets.

The largest 10 investments in the S&p 500 make up about $28 of your $100 investment:

  1. Microsoft - $5.67 - 5.67%
  2. Apple - $5.09
  3. Amazon - $4.27
  4. Google - $3.34
  5. Facebook - $2.04
  6. Johnson & Johnson - $1.64
  7. Berkshire Hathaway - $1.48
  8. Visa - $1.26
  9. Procter & Gamble - $1.22
  10. JPMorgan Chase - $1.1

[circle the top 10 largest companies]

Each additional company receives a little bit smaller percentage of your $100 investment.

By the 500th largest company, Nordstrom, we're only investing $0.03 out of every $100.

A 0.03% investment may not seem like much. If you had $1 million invested, that's still $300 in the smallest company!

[circle and show tooltip for the smallest company]

Diversification

Diversification is one of the core pillars of a good investment strategy. The S&P 500 is well-diversified across the Large-Cap US Stock market, and the US Stock market overall.

Compared to other companies in the last 30 years, the S&P 500 has performed better than some and worse than others.

Rather than attempting to pick the winners, you can invest in the S&P 500 and benefit the overall growth of the US Stock market

[Switch to a growth chart over 30 years. Zoom out to the last 30 years. Add additional lines to the graph for 10 other companies.]

The greatest thing of all about the S&P 500 is it is self-cleaning. When a company shrinks, is acquired, or a few other events occur, it may no longer qualify to be listed in the top 500 companies.

In just the past 5 years, over 100 companies have removed.

[Show a vertical line with an x-axis of market cap and a y-axis of sector (like chartfleau). Highlight the 100 companies that were added.]

Every time a company is removed from the S&P, a well-established, growing company replaces it.

To put this in baseball terms, the S&P 500 is the Major League where all the most successful companies are. All other publicly listed companies are in the minor leagues – striving to make the jump to the majors.

[Highlight the new companies that were added int last 5 years.]

How To Invest in the S&P 500

There are two ways to invest in the S&P 500. The hard way would be to invest in all 500 companies manually.

This would take most of your waking time, cost a fortune in transaction costs, and may result in an absurd amount of taxes.

The alternative is to invest in a single index fund. An index fund is a single investment that represents an investment in many things.

An S&P 500 Index Fund does the work of investing proportionally in all 500 companies – making your life easy!

[GO back to the circle graph with all 500 small circles. Show a single fund on the left for the S&p 500.]

You can select a single index fund in your 401(k) account, IRA, Roth IRA or any investing account.

Every established investment company has an S&P 500 fund.

  • Vanguard 500 Index Admiral  - $VFIAX (or $VOO for the ETF)
  • Fidelity® 500 Index - $FXIAX
  • iShares S&P 500 Index - $IVV
  • SPDR® S&P 500 ETF - $SPY

Some of these are mutual funds (which end in X), while some are ETFs. They all have different stock prices, but each of them invests proportionately in line with the S&P 500 weighting.