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How to Invest in the S&P 500

Michael Allen is a Certified Investment Manager (CIM). Over the course of 14 years, he has managed money for high net worth individuals. Michael is a Senior Investment Specialist at Wealthsimple. Prior to this, he was an investment advisor with BMO Nesbitt Burns Securities. His financial advice has been published in the Globe and Mail, Toronto Star and many other publications. Michael has a fiduciary duty to his clients and holds a Bachelor of Commerce from Dalhousie University.

When you invest in the S&P 500 you’re investing in a stock market index (or grouping of selected stocks) of 500 large US companies. In order to make the list, the financial services company Standard & Poor (the S&P in the S&P 500 — yes, we think it’s an ironic name, too) applies certain financial-health criteria to companies, such as market capitalisation, monthly trading volume, and more…

Look, the point is, the only companies on this list are big and important. Many of them are major household names. The collective performance of all 500 companies is represented by a number — the index’s price return — that you probably encounter on a daily basis. It’s prominently displayed on the homepages of major news sites, and financial news channels update it continuously throughout the day. It gets a lot of attention because it provides a helpful snapshot of the overall health of the market. How those 500 companies go, so goes the economy, the thinking…goes.

The S&P 500 also provides financial management companies with the ability to offer index funds that allow investors to invest in all 500 companies at one time. An index fund is any fund that invests in a broad swath of companies at one time with the aim of tracking the market. The Dow Jones Industrial Average is arguably the most well-known index fund. It tracks 30 “blue-chip” stocks as selected by editors of The Wall Street Journal. (We know — that’s kind of weird! It’s a newspaper!) The S&P 500 involves more complicated criteria, and obviously a lot more companies, but they are both stock indexes — groupings of companies an investor can invest in all at one time.

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Where to invest in the S&P 500

You can invest in the S&P 500 in many different ways—with a bank, a brokerage, a discount brokerage, a financial advisor, or a robo advisor.

Bank:

A bank may seem like the most convenient way to invest in the S&P 500 because it allows you to keep all of your accounts— checking, savings, and index investment account—all in one place. The downside is that fees can be high at banks, and you can’t always get one-on-one, in-person service for investing like you can when you need to speak with someone about, say, your checking account or a loan. That’s because investments are a side business for banks. (Their main purpose is to accept and loan money.)

Discount Brokerage:

A discount brokerage or a trading platform invariably have low fees, but you are totally on your own — there’s no advice to help you navigate your investing approach. It’s completely DIY. This can work out just fine for investors who have a handle on their financial landscape and know how investing in an S&P 500 index fund fits into their investment puzzle, but most experts agree that getting some level of advice is prudent before investing.

Financial advisor:

A financial advisor can help you with this kind of investment, of course, although this kind of service is normally expensive and as such is typically the choice of those investors with a high net worth and the means to pay for “luxury” service. Keep in mind though that it’s expensive because it’s the opposite of what you get with a discount broker. A financial advisor knows your full financial picture, has created a full financial plan for you and has a well-informed view on how investing in an index like the S&P 500 will help you — specifically you — achieve certain financial goals.

Robo advisors:

Robo Advisors are becoming increasingly popular because many combine the benefits of low fees with the ability to talk through your investment approach with an actual human being. They are less hands-on than a financial advisor because they use algorithms that help them figure out what kind of investments are right for you. Some robo advisors offer the ability to speak with a financial planner, particularly if you're investing large sums of money.

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Benefits of investing in an S&P 500 index fund

The benefits of grouping multiple companies into one index is that it makes investing in all of those companies at the same time so easy. If you want to invest in the S&P 500, you could, of course, buy stock in every single company that makes up the S&P 500. That means 500 individual transactions. Five. Hundred. Individual. Transactions. That would mean a lot of clicking or phone calls — and it could mean conversations with your very confused stockbroker or financial advisor, who would then educate you about the existence of a much easier way to invest in the S&P 500: by simply investing in an S&P 500 index fund. In one transaction, you get to invest in all 500 companies at the same time.

Should I invest in the S&P 500?

Had you invested $10,000 in the S&P 500 in 1980 and left it alone (good job, by the way!), you would have around three-quarters of a million dollars today (about half a million pounds). The answer seems clear, right? Of course, you should invest in the S&P 500! It’s not that simple. (Investing rule number 273: When it comes to investing money, nothing is ever “that simple.”) Just because the S&P 500 has delivered major returns to investors in the past, does not mean it will continue to in the future.

Diversification is important as if one company or market performs poorly, your entire portfolio is not dragged down. When you invest in an index like the S&P 500 you are inherently diversifying your investments among different stocks. There are ways to diversify even further, and many investment platforms allow you to do just that when you open a personal investment account.

Investing only in the S&P 500 means you wouldn’t be invested in bonds or real estate — two areas of investing everyone should consider. Further, the S&P 500 only involves stocks of U.S. companies. If there’s a downturn in the United States market, your entire portfolio will take a hit. (For instance, 2002 and 2008 were awful years for the S&P 500 because they were awful years for the U.S. economy. The index lost around a third of its value in each of those downturns.) An index fund should still be considered only one investment tool in your investment toolkit.

However, when you invest in the S&P 500, you do reap the benefits of an inherently diversified stocks portfolio, and it’s hard to beat the convenience that comes with tracking the market rather than picking individual stocks. There are very few financial advisors who would advise against investing in the S&P 500. But they’ll almost certainly advise you to invest in the stock markets of other countries plus bonds and real estate as well.

Best way to invest in the S&P 500

You don’t necessarily need a financial advisor to invest in the S&P 500, at a minimum you'll to open a personal investment account and of course have some money to invest. You can invest in the S&P 500 in a matter of minutes through an online investment platform. Each investing approach all has it's merits, as we mentioned previously. A robo advisor is increasingly considered a great option as fees are low and some offer real, actual, human people — you can get on the phone with should you need them. (And a lot of them are really nice!)

Because an S&P 500 index fund involves 500 different companies, it makes for an inherently diversified investment. And you could certainly invest in a fund that only tracks those companies that make up the S&P 500. But investment management companies offer many different types of funds and portfolio recommendations. For instance, there are funds that include the S&P 500 but also include other types of investments — foreign stocks, for instance, or tech companies that just don’t fit S&P’s “big giant American company” criteria. No matter how keen you are on the S&P 500, you should still consider the 500 to be one investment in your basket — you don’t want all your investing eggs in it.

A major benefit of using a robo advisor to invest is that such companies take care of diversification for you — and for very low fees. You can invest in multiple index funds, including the S&P 500, as easy as you can invest in a single index fund. Robo advisors generally offer portfolio rebalancing, which is a crucially important tool — and one you just don’t get if you go it alone.

Putting your money into an index like the S&P 500 means that your investment’s value can swing wildly over time. A wise investor doesn’t just throw some money into an account and forget about it. Actually, let’s correct that: A wise investor can throw money into an account and forget about it, as long as that investor has someone making corrections to the investor’s portfolio to account for changes in the market. By choosing an investment platform with portfolio rebalancing, you account for market changes. This means you keep the same asset allocation over time — for example, a portfolio that contains 50 percent stocks and 50 percent bonds — aligned with what you’d designated when you started investing. At a frequency of your choosing, your robo advisor will execute certain transactions that will bring your percentages back to where you want them to be.

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Last Updated December 13, 2018

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