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Some years ago I wrote an article titled, “How to invest with confidence.” In this article I delved into key investment fundamentals to consider when investing in the stock market. Below is a short summary of those investment fundamentals:
Objective—Every dollar saved and every dollar invested should have a clear definitive purpose or goal.
Time Horizon—Now that you have a goal and you’re accumulating money to reach your goal, when will you need to access the money to fulfill your goal?
Risk Tolerance—It’s important that you’re able to sleep at night and not be overwhelmed with the up and down swings of the market. Would you consider yourself a conservative, moderate, or aggressive investor?
Diversification—A sure-fire way to minimize risk in your investment portfolio is to have your money spread around in various places. It is safer from an investment perspective to have your investments spread across 200 different companies than to invest in a single company or 10 different companies. You should never put all your eggs in one basket.
Asset Allocation—The biggest decision you’ll make that impacts your return on investment is how your investment is allocated between stock, bonds, and cash equivalents. Stocks are riskier than bonds. Stocks have also been more rewarding than bonds over an extended period of time. According to Ibbotson, an independent research firm, stocks have an average rate of return of 12 percent over the past 100 years, whereas bonds have an average rate of return of 6 percent over the same time span. Cash equivalents averaged right around 3 percent.
Track Record—Before selecting any investment product, you want to look at its track record. The longer the investment product has been in existence, the longer the track record you can obtain. The track record will give you a history of how well the investment has performed over the years.
Dollar Cost Averaging—As opposed to trying to time the market or investing a large lump sum, it’s better to systematically invest money at regular time intervals over an extended period of time regardless of the fluctuation of the market.
Expense Ratio—The expense ratio details the cost that you’re paying for the underlying investment. The lower the expense ratio, the more money you have working for you.
What if I told you there’s a simple way to invest where the underlying investment: Has a 100-year track record. Ensures your investments are diversified or spread among hundreds of companies. Has the lowest expense ratio. A long track record will give you comfort in the investment. A diversified investment portfolio provides safety with your investments. A low expense ratio means higher returns for you with your investment.
There is in fact a simple way to invest with the benefits and security I just mentioned. That underlying investment is the S&P 500 Index.
The Standard & Poor’s 500, commonly known as the S&P 500, is a renowned stock market index that serves as a barometer for the performance of the U.S. stock market. The S&P 500 is a collection of 500 of America’s biggest and brightest companies.
These companies are household names. These companies provide products and services that we purchase and consume on a daily basis. One common investment advice you’d hear is invest in companies that you know. Here’s a list of a few of the 500 companies currently included in the S&P 500 Index: Apple, Amazon, Google. Facebook, Tesla, Home Depot, Disney, Starbucks, CVS, Target, PNC Financial Services, and Johnson and Johnson. I’m sure you recognize all of these companies. I’m sure you spent money with most of these companies. I’m certain that if I had the space to list the other 488 companies included in the S&P 500 Index, you’d be familiar with them as well. By using the S&P 500 Index as your core underlying investment, you invest in all of these companies.
The S&P 500 was introduced in 1957 and is maintained by S&P Dow Jones Indices. The index is weighted by market capitalization, meaning that larger companies have a greater influence on its performance. However, the S&P 500 is also subject to certain rules and criteria to ensure diversity and representativeness. It includes companies from various sectors such as technology, healthcare, finance, consumer goods, and more, which provides a comprehensive snapshot of the U.S. stock market.
To be included in the S&P 500, a company must meet specific eligibility criteria. These criteria consider factors like market capitalization, liquidity, financial viability, and sector representation. The index is periodically rebalanced to maintain its accuracy and to reflect changes in the market landscape.
The S&P 500 holds great importance for investors, financial professionals, and the economy as a whole. It serves as a benchmark for measuring the performance of investment portfolios, mutual funds, and exchange-traded funds (ETFs). By serving as a benchmark, many investment professionals who manage investment portfolios for their clients seek to beat the market (S&P 500) or get better overall investment returns than what the market (S&P 500) did. Important to note 80 percent of investment professionals don’t beat the market. Their returns are lower than the S&P 500 Index.
Did you notice that when I use the market, I put in parentheses S&P 500. That’s because when the financial pundits on TV and radio are referencing the stock market, they’re referring to the S&P 500 Index.. The S&P 500 Index represents 80 percent of the entire stock market. The movements of the S&P 500 are closely monitored by economists, policymakers and analysts. Its performance is often seen as an indicator of the overall health and direction of the U.S. economy. Changes in the S&P 500 can influence market sentiment, consumer confidence, and investment strategies, making it a crucial reference point for decision-making.
For nearly the last century, the average annual total return of the S&P 500 has been about 10 percent. I have a simple investment philosophy. Why try to beat the market (S&P 500) when you can own the market by investing in the S&P 500 Index.
Investing in the S&P 500 can be done through various means. Individual investors can purchase shares of ETFs or mutual funds that track the index. These investment vehicles offer the benefit of diversification across a broad range of companies, reducing the risk associated with investing in individual stocks.
(Damon Carr, Money Coach can be reached @ 412-216-1013 or visit his website @ damonmoneycoach.com)
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