First let’s clarify What a stock market index is?
A stock market index is a collection of stocks that represent either a stock market at whole, or a smaller segment(s) of a stock market.
Have you ever heard in passing, someone or some news station talk about how “The Market” has performed today?
“The Market” usually refers to one of the 3 major United States (U.S.) stock market indexes:
Dow Jones Industrial Average (DJIA) – Also known as the “Dow”.
The Dow is regarded as one of the most followed indexes in the entire world.
The index is made up of 30 of the largest publicly traded corporations in the U.S..
Being that the Dow is made up of 30 of the largest companies in the U.S., it is believed that the index provides an accurate assessment of the U.S. stock markets overall health.
Standard & Poor’s 500 Index – Also known as the S&P 500.
The S&P 500 is regarded as the most efficient gauge in assessing the overall health of the U.S. stock market.
This is because it tracks the performance of the 500 largest publicly traded corporations in the U.S., as opposed to the Dow, which tracks 30 large-cap stocks.
NASDAQ Composite – Tracks roughly 3,000 stocks that are traded on the Nasdaq Exchange, and is predominately made up of Information Technology related companies.
All of the stock market indexes previously mentioned are interchanged frequently by pundits who are discussing “The Market”.
Simply put, all you really need to know is that they each represent either the entire U.S. stock market, or a smaller segment of the U.S. stock market.
So, now that you understand that a stock market index is simply a large collection of stocks that measure either the total stock market, or a smaller segment of a stock market,
What do you think an index mutual fund does?
An index mutual fund, commonly known as an index fund, is an investment fund that pools money from many investors, and then uses that money to construct a portfolio that directly matches and mirrors the performance of a stock market index.
Let’s break this down using the S&P 500 as an example.
S&P 500 Index Fund.
Companies like Vanguard, Fidelity and Schwab, all offer S&P 500 index funds.
These index funds are designed to collect investors money, and invest that money in the exact same underlying stocks that make up the S&P 500.
So, instead of trying to do all the financial analysis and guesswork yourself, and trying to pick individual stocks on your own, you can simply invest in an index fund, like an S&P 500 index fund, and you will be instantly diversified to over 500 of the largest companies in the U.S.
Imagine the S&P 500 as a pie, and an index fund is a perfectly cut piece of that pie.
Once you cut your perfect piece of that pie, you get all the underlying ingredients in perfect proportion to the entire pie.
So instead of working tirelessly on trying to figure out the right ingredients (individual stocks) on your own, you can just purchase a piece of the entire pie and have all the ingredients already prepared for you!
A massive benefit you have as an index fund investor, is the long-term historical track record of stock market indexes, specifically the S&P 500.
Now, that you know what the S&P 500 is, you may be wondering, how to invest in the S&P 500.
Maybe you just started doing research on investing or a beginner.
You always hear famous investors like Warren Buffet say, “The average annual return since adopting 500 stocks into the index in 1957 through 2018 is roughly 8%.”
If you would have invested $10,000 in the S&P 500 you would have made a consistent 8% year of year growth.”
Well the truth is many people don’t know how to invest in the S&P 500.
Today I’m going to share with you how exactly you can invest in the S&P 500.
The reason this becomes confusing for some is because you don’t actually invest in the S&P 500, but you invest in an Index fund that follows the S&P 500.
An index fund that follows the S&P 500.
Meaning if the S&P 500 goes up your index fund goes up, if the S&P 500 (Stock Market) goes down then your Index fund goes down.
There also is a small fee associated with each index fund.
Below are 3 popular index funds that you can invest in that follow the S&P 500.
|S&P 500 Index Fund||2019 Total Returns||Expense Ratio|
Vanguard S&P 500
|31.46%||0.03% / Annually|
SPDR S&P 500 Trust ETF
|31.29%||0.09% / Annually|
|31.44%||0.04% / Annually|
What Fees are Associated with Investing in the S&P 500?
Due to the fact that you are investing in an index fund and not the actual S&P 500 there is a small fee associated with the fund.
This is called the expense ratio.
It is a yearly expense to the fund.
For example, VOO is 0.03%.
In the screenshot below you will see exactly where to find the expense ratio on yahoo finance.
Since all of these indexes follow the S&P 500, I would take a look at their returns (they should be all similar) and what their expense ratio is.
For example, if you invest $10,000 into the S&P 500 you will pay .03% annual expense ratio which is $3 every year.
Simple S&P 500 Calculation
For this example, if you will be investing $10,000 into VOO stock on Feb 12, 2010
VOO Stock was 104 at close on Feb 12th, 2010 &
VOO Stock was 255 at close on April 12, 2020
First calculate percent change ( (255-104 ) / 104 ) = 1.45 or (145%)
New – Old / Old
Then take your $10,000 multiple by (1+1.45) = $24,500 rounded ($24,519.23 exact)
(1 for the initial amount + the percentage change in decimal form)
Alternative way to calculate it:
Here is another way to calculate the same amount:
Take your initial $10,000 / 104 (share amount in 2010) = 96.15 shares purchased
Then multiply the number of shares purchased by the current price
96.15 * $255 = $24,519. 23 exact
Therefore in 10 years you would have made $14,500 off your initial $10,000 investment.
Get Started Investing Today in the S&P 500
- To begin trading you, you need to open an account from one of the platforms below.
- Determine how much money you feel comfortable investing.
- I recommend that you buy shares over time to get the weighted average. This method is referred to as DCA (Dollar Cost averaging) meaning that if you have 10,000 you make 10 purchases of 1,000 on 10 different days.
- It’s important to know if you are trying to catch the bottom it will be almost impossible to.