If you’ve ever read anything about investing, you’ve probably heard the term diversification before.
In fact, you’ve probably heard it before a lot.
As you can guess, this is a pretty important factor for investing. After all, diversification (including different types of investments in your portfolio) is a way to not screw up when the stock market crashes or the real estate business fails.
You will get through the S&P 500 immediate diversification and have access to some of the best stocks on the market.
What is the S&P 500?
First, I want to reveal what the S&P 500 actually is. You’ll find an abundance of “indices” on the stock market – which are essentially a fund that tracks a particular type of stock, sector, company, and so on. So in the case of the S&P 500, it follows the 500 largest public companies. Other well-known indices are the Dow Jones Industrial Average and the NASDAQ.
While you we often hear about Dow in the news, the S&P 500 is actually a better indicator of overall stock market performance. Because it has the 500 largest companies, experts often use it as a starting point to compare how individual stocks work “against the market”.
Many people are unaware of how small the NASDAQ and Dow Jones indexes really are. The NASDAQ is actually called the NASDAQ 100 – because it follows only 100 companies (many of which are technology stocks). The Dow is monitored by only 30 companies.
S&P 500 companies, sorted by weight
Below I will list some of the best companies in the S&P 500. This is just to get a feel for the companies that dominate the top of the list, especially since the portfolio weights will change every day. You can always find a complete list of companies in the S&P 500 if you are interested.
- Microsoft Corp. (MSFT) – 6.2%.
- Apple Inc. (AAPL) – 5.8%.
- Amazon.com Inc. (AMZN) – 3.7%.
- Facebook Inc. (FB) – 2.3%.
- Class A shares Alphabet Inc. (GOOGL) – 2.1%.
- Class C Alphabet Inc (GOOG) Shares – 2.0%.
- Berkshire Hathaway Inc. (BRK.B) – 1.4%.
- Johnson & Johnson (JNJ) – 1.2%.
- Visa Inc. (V) – 1.0%.
- Procter & Gamble (PG) – 0.9%.
As you can see, you get access to some pretty popular businesses. Keep in mind, however, that there are 490 other companies in the index, so you’re well-dispersed at first and you may not need to invest in individual stocks (more on that below).
So how do you invest in the S&P 500?
You cannot invest in the S&P 500 itself, but you can invest in the S&P 500 (index fund,, ETF, mutual fund, etc.) that follows the S&P 500 index. This means that, in essence, each individual company would have shares within the S&P 500.
That way, you don’t have to limit yourself to buying a handful of S&P 500 shares (or more than 500 shares, which I can’t even imagine) and instead you have one investment.
S&P 500 Index Funds
The most common ways to invest in the S&P 500 are index funds and ETFs – both of which will reflect the S&P 500 index. Both index funds and ETFs are similar, but there are minor differences. Index funds will have a higher buy-in and many times lower cost ratio.
They also trade as mutual funds, which means you can only buy and sell them at the end of the trading day.
S&P 500 ETF
ETFs, on the other hand, trade as stocks and there is no minimum investment (other than the price of the stock itself). You can buy and sell shares all day long. In some cases, ETFs will have higher cost ratios.
Frankly, there are two things:
- Your wishes.
- Where are your investments located.
for example if you have 401 (k), it is likely that you cannot select an index fund. But there is a good chance that there is an S&P 500 ETF.
In addition, you need to know your preferences. Some prefer index funds as they are very cheap and you can set them up and forget about them. ETFs move up and down faster as they trade as stocks, so you will need to treat them as one.
Either way – with both types of investments, you’ll be exposed to the S&P 500, so it doesn’t matter what you decide.
Read more: How to invest in an ETF
How do I buy the S&P 500 index fund or ETF?
Investing in the S&P 500 through an index fund or ETF is incredibly easy. In fact, a lot of financial professionals they advocated that this be the primary (if not the only) investment you need.
Here’s how to invest in the S&P 500:
Step 1 – Find the index fund or ETF that suits you
Finding an ETF or index fund that reflects the S&P 500 is very simple. Since all S&P 500 funds will have the same shares with the same weights, see:
- Investment company.
For example, if you are looking for an S&P 500 in your 401 (k), you will be limited to the options available. Otherwise, you can choose a brokerage house that works for you and has a fund family (like iShares) that you want to invest in.
In most cases, the fund family is not important. For example, the difference between Fidelity, iShares, Vanguard or Blackrock S&P 500 warehouse it may not exist. So it’s just about what’s cheapest and what’s available to you. (Note that many people they have an affinity for Vanguard, but you don’t have to).
So the only thing you will need look closely at the cost ratio. The cost ratio is the percentage you pay to an investment firm to manage this fund. for example Vanguard’s VFIAX it has a cost ratio of 0.04% – which is absurdly cheap. This means that for every $ 100,000 you have invested, you will pay just under $ 40 in costs.
Now you can even find free index funds or simply include them in the total management costs at your robotic advisor. There are many options available to you, so it’s best not to waste a lot of time here. Just choose one that mirrors the S&P 500 and has a low cost ratio.
Step 2 – Find good mediation
The first and second steps can be reversed, as some stock exchanges do not offer specific funds. But in most cases, you’ll find what you’re looking for (even if it’s a version of an ETF index fund, as Vanguard usually does).
So the next step is to find a broker – and again, you’ll want to focus on the cost. However, you want to balance the costs and tools / resources available according to your future goals.
Most online brokers are now ridiculously easy to get started and take just a few minutes to open up the web, fund it, and start trading.
Step 3 – Determine the amount of investment and invest
Now that you have chosen an online brokerage account and know the fund you want to buy, you need to figure out how comfortable you are investing. This is a personal decision, but I can tell you that an early investment stretched over a long period leads to a high probability of wealth in the future (smart investing is about long-term asset management!)
It’s real mixing power. So no matter what you decide, don’t overdo it – it’s better to start with something instead of getting paralyzed by analysis and holding back your investment.
Find your fund
Then find the desired fund from your broker. There is usually a search box somewhere on the platform that is easily accessible. Insert a tag (such as a VOO) and it will take you to a screen that shows, among other information, the fund and its performance.
Decide on the number of stakes you want
From there, you will set how many shares you want to buy. Keep in mind that if you are buying an index fund, there is a high probability that the minimum amount of investment will be. If you do not meet this minimum, you will need to purchase a version of the ETF or look for another class of this investment (which usually has a lower buy-in but a slightly higher cost ratio).
Now rent out your store
From there, rent out your trade and you will become the proud owner of some S&P 500 index funds or ETF shares. Or a better look at it, you now own part of the 500 largest companies that are publicly traded in the United States.
Now that you’ve made your initial investment, don’t stop. Set up recurring contributions to invest in this fund as often as possible. Some brokers will also allow you to purchase partial stakes, allowing you to invest more of your money in the fund and average cost in dollars. Either way – keep making these posts so your money can start to increase.
Which S&P 500 funds should I invest in?
Below are some funds you can check out to start investing in the S&P 500.
- SPDR S&P 500 ETF (SPY). It is actually the oldest ETF in the United States, as it was originally available in 1993. It is also the largest ETF with nearly $ 270 billion in total assets. The cost ratio is 0.09%.
- Investor share class in the Vanguard 500 index (VFINX). It is a mutual fund that reflects the S&P 500 and its weights almost equally. It is actively managed so that the cost ratio is higher at 0.14%, but it is worth looking at if you want people to pull the strings behind your fund.
- Fidelity 500 Index Fund (FXAIX). It’s a great index fund (it’s actually a mutual fund) because the cost ratio is only 0.015% – one of the cheapest available. It has also been present since 1988 and is managed by Fidelity, one of the largest investment companies there.
- State Street S&P 500 Index Fund, Class N (SVSPX). This fund has a minimum investment of $ 10,000 and a cost ratio of 0.16%. However, since its inception in 1992, it has shown strong performance (in 2019, it returned more than 31%).
- iShares Core S&P 500 ETF (IVV). It’s biased, but it’s my favorite in the band. IVV has been around for some time and is very cheap (0.04% cost ratio). It is offered through a number of online brokerage accounts and robotic consultants.
The bottom line here: investing in an S&P 500 ETF or index fund is one of the healthiest investments you can make. You will get cheap, instant diversification of your portfolio. Warren Buffett himself doesn’t hurt either recommended these funds.
Finding a fund, setting up an online brokerage, and buying the first handful of stocks is easy and requires little or no research. Then, ideally, you can set up a recurring investment, sit back and relax, and enjoy the long-term gains we expect from the S&P 500 over time.