Investments 101: S&P 500
Updated: Aug 4, 2021
The Standard and Poor's 500, commonly known as the S&P 500, is a stock market index that tracks the 500 largest US publicly traded companies. This index is not only widely followed, but has an impressive annualized rate of return over time. The top ten largest companies make up a little over 25% of the index market capitalization. Some of the current top ten include Apple Inc., Microsoft, Amazon.com, Facebook, Alphabet Inc., Tesla, Inc., Berkshire Hathaway, JPMorgan Chase & Co., and Johnson & Johnson.
There are a number of S&P 500 mutual funds, which allows the common investor to enjoy the benefits of this index without making 500 purchases of individual stocks, There is a management fee within the mutual fund which varies by fund. A large up front investment would be needed to gain the variety of 500 individual company stocks; a mutual fund purchase of any size is already diversified.
What are the returns? The index has been around since 1970, and we know that $1 invested on January 1, 1970 would have grown to $182.06 as of December 31, 2020. Here are a few more key return numbers:
2020 Annual Return 18.40%
10 year annualized return as of 12/31/20 13.89%
20 year annualized return as of 12/31/20 7.47%
25 year annualized return as of 12/31/20 9.56%
Although the one-year return looks much more attractive than the 25 year return, it is important to remember that in the last 50 years, there have been 10 years when the return has been negative. In fact, in 2008 the annual return of the S&P 500 was -37%. And there were three years in a row with negative returns: 2000 -9.1%, 2001 -11.89% and 2002 -22.10%. With risk comes reward, that is if you hold the investment long enough and do not panic and sell while the market is down.
There are many other stock indices we will look at in coming articles. Also much more discussion is needed on relative risk, the time value of money, reinvesting dividends, buy low/sell high, and diversification.