Why conservative investors prefer the S&P 500?

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The number of retail investors has been growing over the past 20 years. This is hardly surprising. Nowadays, with modern digital technologies and a wide choice of retail investment products, anyone can become an investor in just a few months. You can choose from any investment options, be it currencies or stocks. So, you have decided to invest in the stocks of the world’s leading companies. Hold on before jumping in the process. First of all, you should create an effective and stable investment base that can ensure a steady return. The S&P 500 Index might become a core component of your investment portfolio.

What is the S&P 500?

The S&P 500 is a stock market index that tracks the stock performance of the biggest US companies from different economic sectors. The S&P 500 Index represents almost 80% of the total value of the US stock market. The key components of the S&P 500 include the shares of such giants as Amazon Inc, JP Morgan Chase & CO, Microsoft Corp, Facebook Inc, and Johnson & Johnson. Analysts use the S&P 500 Index to determine the state of the US economy, while retail investors see it as a reliable long-term opportunity for investment.

Standard & Poor’s rating agency, or simply the S&P, has been calculating the S&P 500 Index for more than 60 years. The indicator measures the stocks of 500 US companies which explains the name of the index. Nowadays, the S&P actually comprises 505 common stocks. Over the years, there have been ups and downs in the stock market from a short-term perspective. However, in the long run, the S&P 500 has been displaying sustainable growth. Thus, the index has advanced by almost 400% over the past 12 years.

On the chart below, we can clearly see the steady growth of the index. Just like the US dollar index in relation to the EM currencies, the S&P moves steadily upwards in the long term. It can be rather volatile in the short term.

How to invest in the S&P 500?

The S&P 500 Index is a simple stock indicator represented by a number which means you cannot buy a part of an index since the index itself is not an asset. In theory, you can build the stock portfolio yourself by manually picking stocks from the S&P 500 list following a certain ratio. However, it may take you months or even years to form such a portfolio, and it will still be far from efficient. Therefore, many retail investors prefer to choose the S&P 500 mutual funds or ETFs. Today, brokers offer a wide array of ready-to-use investment instruments, including those for the S&P 500 Index.

Investing in the most famous US stock market index has become available to all investors with an accessible level of the initial deposit or trading experience.

To sum up

As an investor in the S&P 500, you can learn more about the global economy and its key element, the US corporate sector. From now on, the release of a new iPhone model or Windows operating system, a merger of major automakers, and new permits for oil production in Texas will be more than just news for you. It is now relevant to your investments and may influence their profitability. This is really exciting.

Advantages of investing in the S&P 500:

1) exposure to a wider range of stocks and companies compared to funds based on other indices such as the Dow Dow Jones Industrial Average
2) no bias towards the technology sector, like in the Nasdaq Composite
3) investments in the S&P 500 usually have the lowest costs in the industry and are always below the market average in terms of losses
4) investments in the S&P 500 are more profitable than in mutual funds

Disadvantages of investing in the S&P 500 ETFs :

1) despite the stability and conservative nature of the index, any investment is always associated with risk
2) the return on the S&P 500 investment rarely exceeds the average market profitability
3) the index tracks only those companies that have a certain volume of market capitalization in free float. This means that some companies are not included in the index. However, this factor can also be considered as an advantage as small companies and start-ups are excluded from the S&P 500 list due to the strict criteria which makes the index a solid and steadily growing investment instrument.

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