Is the S&P the best way to invest? (2024)

Is the S&P the best way to invest?

As an equities index tracking the leading US companies, many people follow the ups and downs of the Standard & Poor's 500 as a benchmark of how the broader stock market performs at any given time. As such, the S&P 500 tends to be suitable as an investment for investors seeking broad exposure to the US economy.

In general, the benefits of investing in the S&P 500 outweigh the disadvantages. Consistent long-term returns: the S&P 500 has historically provided consistent annual returns over the long term—from 1950 to 2023, it has yielded an annualized average return of 11.28%.

Total stock market index funds are only slightly more diversified than S&P 500 index funds. Since both types of indexes are heavily weighted toward large-cap stocks, the performance of the two funds is highly correlated (similar).

Investing products such as stocks can have much higher returns than savings accounts and CDs. Over time, the Standard & Poor's 500 stock index (S&P 500), has returned about 10 percent annually, though the return can fluctuate greatly in any given year. Investing products are generally very liquid.

The S&P 500 is all US-domiciled companies that over the last ~40 years have accounted for ~50% of all global stocks. By just owning the S&P 500 you miss out on almost half of the global opportunity set which is another ~10,000 public companies.

Assuming an average annual return rate of about 10% (a typical historical average), a $10,000 investment in the S&P 500 could potentially grow to approximately $25,937 over 10 years.

Commonly called the S&P 500, it's one of the most popular benchmarks of the overall U.S. stock market performance. Everybody tries to beat it, but few succeed.

The greater a portfolio's exposure to the S&P 500 index, the more the ups and downs of that index will affect its balance. That is why experts generally recommend a 60/40 split between stocks and bonds. That may be extended to 70/30 or even 80/20 if an investor's time horizon allows for more risk.

While dividend ETFs can offer stable income, their growth potential is generally lower over the long run. That said, dividend ETFs may outperform the S&P 500 during particular time frames, such as during a recession or a period of easing interest rates.

Stock Market vs.

In terms of averages, stocks have tended to have higher total returns over time. The S&P 500 stock index has had an average annualized return of around 10% over very long periods (higher if you include dividends), while average annual real estate returns are often more in the 4-8% range.

Should I put all my savings in S&P?

It is a good idea if you invest for a very long Investment horizon. If you are lucky enough to be able to afford an investment horizon of 30 years, probably low-cost index funds (S&P 500 index) are the safest option, compared to anything. But be careful not to make sudden decisions in big crashes.

The value of the S&P 500 is susceptible to market risk, meaning that it can fluctuate if the overall conditions of the broader market changes.

The main drawback to the S&P 500 is that the index gives higher weights to companies with more market capitalization. The stock prices for Apple and Microsoft have a much greater influence on the index than a company with a lower market cap.

Buffett's rationale behind endorsing S&P 500 index funds is rooted in their simplicity and effectiveness. He argues that attempting to outperform the market is futile for most investors, and instead, they should seek exposure to the broad U.S. stock market through low-cost index funds.

While there are few certainties in the financial world, there's virtually no chance that an index fund will ever lose all of its value. One reason for this is that most index funds are highly diversified. They buy and hold identical weights of each stock in an index, such as the S&P 500.

Also, research suggests that when it comes to the S&P 500's historical returns, there's never been a bad time to buy as long as you're a long-term investor.

Data source: Author's calculations. As you can see from the chart, investing $5,000 annually in the S&P 500 would make you a millionaire in a little over 30 years, assuming average 10.25% annual returns.

Craziest thing I learned recently: $10,000 invested in the S&P 500 in 1980 would be worth over $1M today.

Over the past 96 years, the S&P 500 has gone up and down each year. In fact 27% of those years had negative results. As you can see in the chart below, one-year investments produced negative results more often than investments held for longer periods.

What is the 10 year return of the S&P 500?

For example, the ten-year annualized return through 2019, which is 13.55%, exhibits the annualized rate of return produced by the S&P 500 starting in 2010 all the way through 2019.

Investing in an S&P 500 fund can instantly diversify your portfolio and is generally considered less risky than purchasing individual stocks directly. Because S&P 500 index funds or ETFs track the performance of the S&P 500, when that index does well, your investment will, too. (The opposite is also true, of course.)

Similarly, the index is made up of only stocks. When the stock market is experiencing a general downturn, there are no other asset classes (like bonds and REITs) to counterbalance that loss. This is why investing only in the S&P 500 does not help the investor minimize risk.

Berkshire Hathaway has a tiny bond allocation in its investment portfolio, which mostly supports its huge insurance business. This contrasts with most insurers, who keep the bulk of their assets in bonds. Berkshire CEO Buffett favors stocks and cash—mostly U.S. Treasury bills.