Finding which stocks to invest in requires a lot of research and know-how, which is why so many people shy away from investing altogether. Many people find investing money to be a daunting task and assume that it comes at a great risk. However, this does not have to be the case. One of the best ways to invest in a diverse portfolio of stocks is by investing into an index fund such as the S&P 500.
Index funds are a great way to make money for an average investor.
What Is an Index Fund?
An index fund is a fund which allows you to invest into a diverse portfolio of stocks easily that tries to match exactly the investments of a major market index. In the case of the S&P 500, one of the oldest and biggest indexes around, this fund is simply referred to as “the market,” since it involves the majority of the U.S. economy.
The S& P 500 Index is a collection of some 500 different stocks, all of which are chosen based primarily on their industry category, size, and their liquidity. The purpose of these stocks is to function as an important gauge of United States equities and allows investors to assess the risk and reward of large companies. In order to be listed on the S&P 500, companies must have a market capitalization above $10 billion and have common stock listed on the NYSE or NASDAQ. Some of the world’s most successful companies call the S&P 500 home, and range from industrial conglomerates like Apple, Sony, Amazon, Salesforce.com and many other work-class corporations. Click here to view the list.
As a result, the S&P 500 serves an important function for economists and investors alike; acting as a chief indicator of market health, and a way to spot signs of any potential market challenges as they arrive.
Historically S&P 500 Index averaged 8.5% return per year. While investing into the indexes can be very expensive, for instance S&P 500 is now $2,145 per share, there are solutions that can allow average investor benefit from the market return. To find out more what those solutions are, carry on reading.
It Comes Highly Recommended
Warren Buffett, one of the most successful investors in the world, highly recommends investors to choose index funds. He demonstrated his recommendation in a 10-year-long experiment: a million-dollar wager with a major hedge fund company that investing in the S&P 500 index fund would yield a better return than the hedge fund’s hand-picked investments. After 10 years, Buffett’s picks yielded returns that were 40 points higher than his competitor. Buffett called this experiment the most important investment lesson in the world.
William F. Sharpe, Nobel Prize-winning American economist and retired Stanford professor recommends investing in index funds as well. His whole approach involves passive investing rather than active investing, for two reasons. One, passive investing typically involves choosing an index fund because the gains will be average at worst. Two, passive investing is very simple—it goes with the ebb and flow of the market, thus requiring very little oversight and therefore fewer people taking a cut of your profit and decreasing the management fees.
S&P 500 Index Facts and Figures
TSince its inception in 1957, the S&P 500 has reported positive growth around 75% of the time. Only 14 times did the index report a negative return. It has grown almost 4,000% since 1957, making it an excellent example of great gains over the long term.
Over the past 80 years, the S&P’s dividend component is responsible for 44% of the total return of the index. The average rate of return for the Standard & Poor’s 500 stock market and index since its inception is an approximated 10%. The S&P is quite resilient and recovers quickly after market recessions. With the S&P’s ability to recover from market recessions fairly quickly, investing in index funds and sticking with it, is quite safe.
By investing into Indexes such as S&P 500 you would cancel out unsystematic risk. Every investment carries 2 types of risks:
(1) Systematic - market risk which is impossible to predict or completely avoid.
(2) Unsystematic risk - risk that any investment holds i.e. bankruptcy or low earnings. This risk can be eliminated through diversification.
Index Funds Are Cost Effective
Index funds are proven to be much more cost effective than actively managed funds. This is because actively managed funds require more overhead, such as analysts, fund managers, traders and many more qualified experts to give you good returns. (This is one of the main points William F. Sharpe made in his support for index funds.) All of that management and overhead cost the investor much more money, ultimately shrinking the bottom line of returns. Index funds require much less management and overhead because their job is as simple as mirroring the market index.
Diversifying Your Portfolio with S&P 500
The old adage “diversify your portfolio” is never more completely understood and utilized than by investors in index funds. Rather than dividing investments into four quadrants ranging from stagnant security to aggressive growth, index funds take diversification to the next level by investing in the entire market. When the market grows, so does the fund.
Index Funds Require Little Maintenance
Index funds are designed to be invested in and then left alone for years to come. After a 20- to 30-year investment, the average return should be quite large and more than enough for retirement. This is part of the huge appeal of index funds. The do not require a lot of research and maintenance. Instead, you simply find an index to invest in and then let it sit and your returns will grow over time. You will always have the peace of mind knowing that your investments are not underperforming and that they are meeting the standard, without having to watch your fund like a hawk.
Would You Like to Invest into S&P 500 - Solutions for Average Investor
A popular 15 year regular contribution plan is available where you can invest on a monthly, quarterly, semi-annually or annual basis.
The plan guarantees your capital to not reduce in value and earn an average return rate of 8.5% per year.
For example, lets say you save $1,000 per month, your total contribution will be $180,000. At the end of 15 years, with an average return of 8.5% per year, you would receive $360,000.
100% principal capital is guaranteed by HSBC
Option to contribute monthly, quarterly, semi-annually, annually
Average return of 8.5% per year
Participation in the growth of the S&P 500 Index
Security through the safe and private custody of assets
Ability to participate in the stock market growth without the downside risk