What is the S&P 500 and How Can I Make Money Off of it?
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What is S&P 500?
The S&P 500 index, also known as Standard & Poor’s 500, in contradiction to what the name might imply, is a weighted index of the market capitalization (market value) of the 500 largest publicly traded companies listed on the US stock exchange.
Contrary to the popular belief, S&P 500 is NOT a list of the top valued companies in the USA because other criteria are factored into the index.
There are several largely regarded indices other than S&P 500 that are popular in the US such as Dow Jones and Russell 2000, but when it comes to measuring the performance of the US economy, S&P 500 is unrivaled.
It has been considered as the most accurate indicator of how well the stock market is performing by most experts for as long as the stock exchange world can remember.
Market summary for S&P 500 for the past 5 years from 2017 to 2022.
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Now knowing how well looked upon this index is, here’s how it works, what you should know about it as an investor, and how Wealthface can help you use it to make smart decisions.
Why is S&P 500 so Highly Regarded? How Does it Function?
One of the reasons why S&P 500 is generally viewed as more important than other indices is because of how diversified it is.
The index weighs in virtually all types of industries and top-notch companies coming from all fields, from finance to technology and much more.
By looking at the index from another perspective, it isn’t just an indicator of the performance of these stocks, it serves as a statistical measurement as well.
With this in mind, portfolio performance can be evaluated against the S&P 500 index by using it as a benchmark.
Why Is Portfolio Diversification Important?↗
S&P 500 assigns weights to each company, which means the companies near the top of the list, which are the largest companies, have a lot more influence on the index than the ones near the bottom.
For example:
If Apple Inc. suffers a 20% loss, this could mean hundreds of billions of dollars of loss for the index, while a 20% loss for some other company near the bottom would only mean a few hundreds of millions of losses.
This weighting system allows the index to adjust itself and remain an accurate indicator of the entire list of companies.
At the end of 2020, the market capitalization of S&P 500 was valued at around $33.4 trillion.
Should I Invest in S&P 500 and How?
Before diving into whether or not it is a recommended investment, we need to set things straight. You can’t directly invest into S&P itself, as it is only an index and not a tangible stock.
The long, time and money consuming way to do so is by buying stocks of every company on the index, which amounts to around 500 separate transactions. Good luck with that.
The smart way around it, however, is investing through ETFs, which are funds that intelligently mimic the performance of S&P 500 that you can directly invest in and leave all the hard work for them to do.
Now to answer the big question,
Is S&P 500 worth investing in?
So, the answer is yes, S&P 500 is absolutely worth the investment.
If you had invested in S&P 500 just around the beginning of the 2000’s, you would have already quadrupled your money by now, and this is in 20 years’ time only.
However, just because the index has made large returns in the past doesn’t make any guarantees about its future performance, which is why we at Wealthface encourage you to take some precautions in order to secure your portfolio against any scenarios.
The most powerful and consistent weapon you may wield against sudden unexpected movements in the market, is diversification.
Even though S&P 500 branches across several industries and markets, you are still primarily investing in the same brand: large US corporations.
Though this may seem stable enough, the political world never really is, and in this case, it could cost you dearly.
In order to protect you against worst-case-scenarios, and to ensure that you are available at almost every spot where an opportunity could emerge, here are Wealthface’s recommendations for you:
Investing in Different ETFs:
As previously mentioned, ETFs only mimic the performance of the S&P 500 index and rebalance your account around prospected rises and drops in the weights of the listed companies.
It’s worthy of mentioning that different ETFs have different strategies with regards to their mimicking efforts, and so could lead to different results.
We recommend that you diversify your portfolio across multiple ETFs which will ensure more combinations of weights and thus more secure returns.
Check out these 7 interesting ETFs to keep in your portfolio.
Diversifying Beyond S&P:
While S&P 500 sound like it covers everything there is, make sure to remind yourself every morning that it doesn’t.
S&P is bound by geographical location and geopolitical factors; you should make sure you have a plan B in case large American corporations take a downturn one day.
Wealthface recommends that you plant some seeds outside the meadows of S&P.
This may include investments real estate, bonds, and stocks and shares of EU based companies and indices such as the DAX index.
We hope this has broadened your spectrum and knowledge about indices in general and S&P 500 in specific. It excites us to see your curiosity and interest in building yourself a better, more secure future, and we are pleased to offer you our services to walk you through it all.
Create your investing account with Wealthface today and gain access to industry-leading experts for advice and consultation to help you unleash your investing journey.
