Investing > How to Invest in the S&P 500

How to Invest in the S&P 500

Investing in the S&P 500 is a trusted path to stable and consistent returns—if you get started on the right foot.

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Updated July 02, 2021

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You’re looking for reliable, long-term portfolio growth, right?

Well, good news: The S&P 500 has a history of providing just what you’re searching for.

Buying straight into the index of top 500 U.S. companies will mean your portfolio moves and grows together with the markets at large. Right off the bat, this could mean a portfolio that’s safe and low-maintenance, leaving you to relax on the beach while your money grows. 🏖

But before all that relaxing, you should know all about investing in the S&P 500—because some investment options are much cheaper and more sensible than others.

Buying into 500 giant companies might seem a little pricey to take one of everything, but you can start investing in every major company in the country for just $1. The S&P 500 consistently hits all-time highs; It has come roaring back to life since the pandemic crash, and it continues to return serious gains for investors who decide to hold long enough. 

Before you put your cash into the S&P 500, we will explain how to do it cheap, how the index has really performed over the years, and what similar alternatives you can choose to spice up your portfolio.

What you’ll learn
  • What is the S&P 500?
  • Importance of the S&P 500
  • How to Buy a Piece of the S&P 500
  • S&P 500 Investment Strategies
  • How to Pick an S&P Index Fund
  • Retirement Accounts
  • Average Return on the S&P 500
  • Alternatives to the S&P 500
  • How to Beat the S&P 500
  • Why Invest in the S&P 500?
  • S&P 500: FAQs
  • Get Started with a Stock Broker

What is the S&P 500? 🔎

The Standard and Poor’s 500 index, or as it is better known, the S&P 500 is an index of the 500 biggest companies traded publicly in the US. The size of these companies is rated based on their market capitalization—the value of all a company’s outstanding shares.

The S&P 500 has all of the familiar players and household names. You can find Microsoft, Google, and JPMorgan, and many others. These companies have market capitalizations from anywhere between 500 Billion to over two trillion dollars. Apple, the largest company on the S&P 500, sits at right around $2,050,000,000,000. 

On the other end of the index, there are some recognizable and unrecognizable brands. Corporations like Gap (10.99B market cap) and Ralph Lauren (8.5B market gap) comprise the lower value stocks. Even on the small side, the businesses are still massive which drives the S&P 500 to all-time highs again and again.

What’s the Importance of the S&P 500? ⚡️

Because the S&P 500 is so large, it is often used as a metric for how the stock market is performing overall. When you read or listen to financial news, you’ll often hear a market day defined as how many points the S&P 500 or the Dow Jones Industrial Average ticked up or down. You can also pick up this information from learning to read charts.

Big swings in the S&P 500 are national news, and it can help you understand how your investments are doing at a glance.

But the real reason that investors should care about the S&P 500 is that it is easy to start making money passively. The S&P 500 is one of the best ways that long-term investors have made consistent gains. 

Many people have heard of Warren Buffet’s famous long bet against the Protégé Partners hedge fund. If you haven’t, here’s the scoop: World-famous value investor Warren Buffet made a $2.2 million bet that over a ten-year period from 2008-2017 an S&P 500 tracking index fund would outperform hedge fund portfolios when accounting for all expenses. By the way, he won that bet.

If you’re looking for a way to beat the returns of hedge funds, you should care about how the S&P 500 works. You should also want to know how you can get your hands on a piece of it.

How to Buy a Piece of the S&P 500 🧩

The S&P 500 can be bought in a number of ways. The first thing to know is that most of the time, the easiest way to make an investment in the S&P 500 is with an index fund or an Exchange Traded Fund (ETF). 

While almost all funds managed passively or actively have some kind of expenses associated with them—well except for FZROX (one of the reasons you might want to look into Fidelity)—it’s a major benefit that S&P 500 funds have some of the lowest costs in the business. 

You’ll need to purchase your funds through a reliable stock broker. Different brokerages will have various pros and cons, but a good one will give you access to the tools you need to purchase parts of the S&P 500. Some of the best brokers for passive and long-term investors will have options that eliminate the mental workload that comes with being an investor. And then, there are the robots.

More specifically, Robo-advisors—these are algorithm-driven financial planning machines that can make some of the incomprehensible mechanics of the stock market easier to understand. Some of our favorite robo-advisors can help you create an investment strategy and stick to it. 

Some robots can even be put on auto-pilot, and will manage your entire portfolio without making you lift a finger. But don’t worry, the robots are always under the guidance of investment experts, who are still human for the most part.

S&P 500 Investment Strategies 📈

The S&P 500 can be tackled from a few different angles. Ultimately, your investment decisions will fall back on those classic pillars that determine most of your financial decisions:  your financial goals, your risk tolerance, and the time you have to invest. So whatever your situation, there are a few strategies to keep in mind.

1. Invest for the Long-Term 📅

Gains in the S&P 500 can vary from year to year, but to see the average and consistent returns that make the investment safe will take several years. Don’t sell your holdings too early and lose money.

For example, it is not uncommon to see the index go into negative numbers one year, or even a few years in a row. However, it has always been positive over periods of 5-10 years, so hastily selling it as soon as you see a downturn is not a great idea unless you have a better asset to invest your money into.

2. Minimize Tax Liability 🏛

Understanding who is managing the fund you decide to invest in can have a bearing on your financial liabilities. If you pick a fund with high turnover, you may owe more money because of the tax burden you incur.

3. Put it on Auto-Pilot ✈️

With the explosion of quality investing apps and robo-advisors, it’s easier than ever to start investing consistently and automatically. Investing in the S&P 500 overtime and using dollar-cost averaging can reduce your risk.

Note that it is a bit cheaper to invest on your own and it gives you a bit of flexibility, but using a passive investing service is entirely hands-free. It will usually cost you from 0.25% to 0.4% of your portfolio each year if you use a robo-advisor.

Buying Indexes 💰

One of the most popular ways to invest in the S&P 500 is by buying an index fund. Index funds are low-cost mutual funds or ETFs that track the S&P 500 and replicate its composition. All in all, learning how to invest in index funds is pretty simple.

The good thing about these funds is that they will automatically adjust to match the market. Moreover, there is very little active management going on which reduces the opportunity for human error. 

This is good news because it will reduce the turnover in your portfolio, meaning your tax liability will be lower. The bad news is that when the market heads down, so will your investment. The index is going to track those assets on a good day and a bad day.

Some of the most popular index funds come from one of the biggest stock brokers, Vanguard. The company was formed by the man that basically invented the asset class and is one of the godfathers of long-term investment strategies, Jack Bogle. Bogle’s advice on investing gives us important factors to keep in mind when deciding on which funds to buy namely, diversifying, eliminating costs, and holding for the long-term.

How to Pick an S&P Index Fund 🗂

Picking the right index fund can be just as critical as deciding to invest in the S&P 500 at all. The thing to keep in mind is that not all index funds are created equal. Keep an eye out for the metrics here.

Expense Ratios ⚖️

The expense ratio is the one topic that gets the most press. Expense ratios can vary wildly. The good news is that we aren’t in the hedge fund domain where funds are using a “greedy” 2 and 20 fee structure. These indexes are going to be a lot lower, often beneath 0.1%. But we may be getting ahead of ourselves here. Why are we even being charged?

The short story is that everyone is trying to make a buck. The index and mutual fund industry are no different. The companies that provide market tracking indexes are going to charge you to use them to cover costs associated with the fund—this distinguishes mutual funds from buying the stocks outright, although that may be an option if you are trying to decide between the two.

An expense ratio is an expression of how much you will be charged based on the amount of money you have in the fund. You always pay a set percentage per year, but some funds have much lower fees than others.

Popular S&P 500 Tracking Index Funds

FundTickerExpense RatioAnnual cost per $1,000
Vanguard 500 Index Fund Investor SharesVFINX0.14%$1.4
SPDR S&P 500 ETFSPY0.095%$0.95
Schwab S&P 500 Index FundSWPPX0.02%$0.20

Overall, you can see that the expense fees are not very large. The gains from the funds will more than make up for the money you are paying the companies.

Investing in the S&P 500 Efficiently ✅

The S&P 500 is going to return money to you over the long run. The important thing is to figure out how to maximize the amount you’ll receive. While it’s nice to look at expense ratios and hammer down a good portfolio turnover, let’s talk about the tax-skeleton in the closet.

You’re going to owe money at some point on this cash you’re investing. So, what does that look like?

First of all, whenever you buy an asset and then sell that asset for more than you bought it for, you will owe taxes. But it makes a difference whether you’re selling your shares 3 months after you bought them or 30 years. This is because the tax categories are split into short-term capital gains, long-term capital gains, qualified dividends, and unqualified dividends.

⚖️ Confused about taxes? Check out our in-depth stock trading tax guide.

Dividends 👍

Your Index fund is going to pay you dividends from the companies you are buying into. These dividends will be taxed differently depending on how long you’ve held the company. If you have a qualified dividend you will be taxed at the capital gains tax rate which changes from time to time, but which are outlined in the IRS manual.

Ordinary dividends will just be taxed like regular income. If you don’t meet the one-year holding requirement, you will be taxed for whatever your regular income tax rate is. This is one of the reasons it’s better to hold onto a stock for the long term if you think the company is doing well.

Capital Gains ⚠️

If you buy and sell a company within the same year, you will also owe tax at your regular rate. That’s because capital gains that are held for more than one year are taxed at the same favorable tax rates that apply to qualified dividends.

Tax Liabilities for Stocks

Capital Gains Tax Rate (0%, 15%, 20%)Regular Tax Rate
Long-Term Capital GainsShort-Term Capital Gains
Qualified DividendsUnqualified Dividends

Retirement Accounts ⏳

If you are thinking about very long-term investments, you may want to consider retirement accounts. If you are looking for a quick and easy way to not pay your taxes, then this is how you do it without getting thrown in jail.

Retirement accounts will have various tax advantages and there are a few different kinds out there where you can maximize your investment returns by avoiding taking profit from them for a long time. While there are ways to pull money out of them before the ripe old age of 59 and ½ there are often penalties associated with doing so—before putting money in a retirement account, be sure it’s what you want to do.

🔎 Looking for a retirement account? Check out the top brokerages for IRAs.

What is the Average Return on the S&P 500?

Average S&P 500 returns will vary only slightly from one index fund to another, and most of the differences will come down to fees. The massively popular SPY can give us a good idea of what returns should look like. SPY premiered on the stock market as an ETF on January 22, 1923. Its share price was around $40.

Price graph of SPY
 Price graph of SPY since it’s creation. Image by TradingView.

We can see that in the past 30 or so years, the price has increased almost 10 times. To most people, this would look pretty good. But is it?

If we look at the benchmarks for SPY over the past few years, we can see more important information to help clarify.

1-year3-year5-year10-year
30.38%14%16.71%13.31%

While the average return can swing widely in the short-term. We can see that over a long period of time, the index has been able to reliably return more than 10% to investors. This makes the index an excellent vehicle for those willing to hold.

To put things into perspective, if you invest $10,000 now and enjoy a 10% – 12% return rate over the next 45 years, you will have a million bucks. Now if you invest a bit of money each month on top of that, it’s a much quicker process—that is one way to secure your retirement.

Alternatives to the S&P 500 🗃

 Although the S&P 500 is the staple food of financial cuisine, there are similar indexes you can use to achieve great long-term results. Alternatives to the market index are very numerous, but here are just a few of the most popular examples.

KBE – SPDR S&P Bank ETF

For investors interested in the more financially geared sector of the S&P 500, they can look to KBE. This is a weighted ETF that focuses on banks and has holdings in several large banks throughout the country.

While some weighted ETFs will outperform the S&P 500 because of the nature of their sector, this one has not done so over recent years. Some will say that the reason for this is because the banking industry is much more speculative in general than the rest of the market because their mechanisms are so convoluted that it’s hard to get a real understanding of what they are even selling.

graph of KBE
KBE over the past 5 years. Image by TradingView

However, there is a logic behind investing in banks. For example, things like a sudden rise in interest rates will hit the entire stock market negatively, while the banks might even get a boost in their stock price because higher interest rates mean more money for them. Not the most inspiring way to invest for sure, but it can be profitable nonetheless.

QQQ – Invesco QQQ Trust Series 1

QQQ is one of those interesting investments that has outperformed the S&P 500 over the past few years. While this ETF is still looking at the same underlying asset classes as other index funds, it is weighted towards large tech companies like Apple, Google, and Microsoft. Just like we’ve seen those corps explode in value, we see QQQ follow suit.

But this might just be a fad that’s bound to fade. We have already seen some investors cool on tech stocks, so their inherent allure of innovation might lose its charm in the next few years.

graph of QQQ
QQQ over the past 5 years. Image by TradingView.

SPDN – Direxion Daily S&P 500 Bear 1X Shares

SPDN illustrates one of the fundamental truths of the stock market, which is that there is always the potential to make money. While the 5-year returns of this bad boy might look the scariest to investors, it’s important to know that this is a bear fund, meaning that this ETF is held by people who are betting against the returns of the S&P 500. This is an important strategy for many investors because it allows them to make money on an index even during a downturn.

A good illustration to take away from this is to look at that spike in early 2020—the COVID-19 crash that destroyed portfolios with one hand, made many investors rich with the other.

This was when one of the biggest dips in the S&P 500 was happening and SPDN was making gains. That’s because it is short on the S&P 500. Although the bullish pandemic market might have you balk at this fund, it has its place.

graph of SPDN
A graph of SPDN over the past 5 years. Image by TradingView.

Unlike the S&P 5oo and the other indices we mentioned, the SPDN isn’t a great long term investment, as you can clearly see from its long downward trend. However, it is a good hedge against a downturn in the markets, as well as a great index to hold during a recession—in a bear market, the SPDR will grow while the S&P dwindles.

How to Beat the S&P 500 🚨

Beating the S&P 500 can happen, and it might even be easy to pull off over the short term. Sometimes you see investors with massive gains in a year where the major indexes only rake in a measly 4 or 5%. The reason you don’t see the people get continually richer and richer from risky plays is because it’s hard to sustain gains when risk is excessively high. Most active investors make worse returns than people who just invest in the S&P 500.

You can try different techniques to beat the S&P 500 such as day trading or options trading. But some of the most famous investors have made long-term, better than average returns by investing in companies they believe in.

This is called value investing, and it can be an incredible way to grow your portfolio. It may not be for everyone though, as it does take a long time to understand how the market works and how the fundamentals work, and how technicals impact the share price. 

To get the best returns on value stocks, you will need to get in them at a good price. You do this by taking advantage of dips and crazes. Warren Buffet has done this by being a contrarian investor and heading away from the herd.

Summary: Why Invest in the S&P 500? 🔦

Investing in the S&P 500 comes with some serious upsides and the downsides are limited. On one hand, you will be safe and will move with the markets—and since markets usually do well over the long term, investing like this is considered perfectly reasonable.

However, S&P will never give you above-average gains since it is the index that defines what is average. On the other hand, you will never experience above-average losses either.

Pros and Cons of Investing in the S&P 500

Pros

  • You will get average returns compared to the overall market.
  • There are easy ways to buy into the market with things like ETFs and Mutual funds.
  • You will likely not experience extreme losses.

Cons

  • Your returns are likely to stay average because you are only doing what average investors do.
  • Your portfolio is subject to more volatility than things like bonds.
  • You can’t buy in at a good time as you can with value stocks.

Whether you are new to investing or have been in the game for a long time, the S&P 500 is a great asset to have in your portfolio because it is your best bet for long-term gains. As long as you can hold on through the hard times, your money will rise and you can make a profit.

S&P 500: FAQs

  • What Does the S&P 500 Measure?

    The S&P 500 tracks the 500 largest publicly-traded companies in the United States. The index compares companies by market capitalization.

  • What is the Minimum Investment for the S&P 500?

    The minimum investment to get started with the S&P 500 can be as low as $1 thanks to fractional shares. Depending on your brokerage, you may be able to purchase a fraction of a share of an S&P 500 investment and your $1 will be working just as hard as if you invested $300.

  • Is S&P 500 Index a Good Investment?

    The S&P 500 is often considered a good investment because it consistently returns average profits to stock investors. Beating the S&P 500’s returns is difficult over the long-term.

  • Can You Just Invest in the S&P 500?

    Some investors keep their entire portfolio in the S&P 500 using a single index fund or ETF. While buying just one ETF may seem like a bad idea, you will actually be incredibly diversified.

  • Is Now a Good Time to Invest in S&P 500?

    The best time to start investing is now. The S&P 500 is a great way to start; if you have disposable income, you should seriously consider investing today.

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