The S&P 500 is all the buzz everywhere you look! From your pre-installed iPhone Stock App to the news, Twitter, even Instagram…there it is! You can’t seem to get away from the S&P 500 daily performance.
The S&P 500 sounds more complex than it really is. It was created by Standard & Poor (hints the S&P for short) in 1957 and it is made up of the largest publicly traded 500 US companies (hints the number 500).
Technically, the 500 stocks are chosen for market size, liquidity, and industry group representation.
There are 11 different sectors (I will explain in detail later) that are covered and it is supposed to be a reflection of how the United States economy is doing as a whole.
The beauty of the S&P 500 is that it basically shows you the largest and most stable large US companies.
Many financial institutions have created index funds that track the S&P 500 and allow you to invest in it. Think of an S&P 500 index fund as a bowl of skittles where each color represents one of the 500 companies.
Why should I care about the S&P 500?
Listen, most people can care less about how certain companies are selected to be in the S&P 500 but everybody and their mom cares about what the S&P 500 can do for their money.
Because investing is powerful. It is one of the only ways to truly create passive income for yourself. We can sit here and talk about all kinds of ways to make money but we can’t talk about it without talking about investing.
The S&P 500 index is a simple way to invest money when you don’t know where to start or when you have no help.
Investing your money in crypto might be exhilarating but there are no criteria that you can follow to see why the investment is so great.
Where do I buy into the S&P 500??
Alright, I know exactly what you’re thinking “just tell me where to get it”!
I totally understand. Not so fast though!
Before I move on to the next thing, I want to make sure that you understand that an index fund has to be purchased within an investment account.
What most people don’t share is that you don’t necessarily have to open up a NEW investment account to do this.
The vast majority of Americans invest nearly all of their money through an employer’s 401(k).
Here’s the thing, you probably already have an S&P 500 index fund available to you within your 401(k) plan.
Yes, I know that you are not very likely to even know your 401(k) account username and password, heck you might not even know what 401k provider your employer uses.
Don’t panic, just call the HR manager and ask them for this information.
Once you know where it is, you can log into your account and look under the “Investment Options” tab.
When you look at your investment options, you will likely find a fund that has the words “S&P 500 index” within the title.
I am not your advisor so I am not giving you investment advice, I am just sharing that you likely already have this option. Ok? Ok!
If you do have an advisor, you can simply ask them to add it to your portfolio.
Otherwise, you can buy into the S&P 500 index fund at just about any financial institution but the ones that are the most popular today are:
How much of my portfolio should I allocate towards the S&P 500 index??
This is the biggest question most people ask me when I am rolling out a new 401(k) plan for a company.
The truth is that every single person has a different appetite for risk. High-risk takers can be more aggressive with their funds and therefore allocate a higher percentage of their portfolio to a higher-risk fund vs. someone who is more risk-averse.
Your S&P 500 index will go up and down almost daily, that’s just the name of the game.
Some people don’t mind the swings of the market, other’s freak out the second they see the numbers go down. Even if it’s temporary.
The way I explain this concept is pretty simple: Are you the type of person that likes to take risks and is not easily afraid of trying something new if it means you have the potential to grow your funds, even if you could lose money?
The other question you have to ask yourself is how many years you have until you need the funds.
Maybe you have a pension so you won’t be depending on the S&P 500 performance as much but maybe you want to buy a house in 5 years and you are hoping your funds grow to be able to put down a 20% down payment.
You can see how sometimes answering that question requires more knowledge right?
So here are the S&P 500 facts throughout the years (history is no indication of future returns):
- When the S&P 500 started in 1957, it was at $386.36 (wooo man, that alone will make you feel older right?)
- It dipped below 300 after a slow decline from 1969-1981 (not a good time for inflation but now I am making you dizzy going from flashbacks to deja vu)
- From 1982-2000 the S&P 500 grew like a monster!! 1,350% wow!
- 2000s was all about the tech bubble…until it wasn’t…
- 2007-2009. 2007 brought a record high only to crash and eventually bottom out in 2009 but do we really need to bring up the Financial Crisis and Great Depression?? Yes, we have to invest with our eyes wide open!!
- 10-year bull market
- 2020’s pandemic got the best of the S&P 500 for sure but not for long
- 2021 the S&P 500 has hit all-time record highs again
If going on that quick roller coaster reading the bullet points doesn’t tell you that the S&P 500 has always gone up and down, I don’t know what to say.
The point is that you will want to allocate money to your S&P 500 index fund in proportion to your risk tolerance, time horizon, and overall financial goals.
What are the S&P 500 criteria??
As with any other list, you must meet certain criteria to make the cut right? Think of these 500 companies as the most desirable dates on a dating show. Sorry, not everything is about love I know.
You should probably know the “deal breakers” though.
For a company to be listed in the S&P 500 It has to be a corporation that files a 10-k annual report. IRS lingo. If it is not based in the U.S.; that’s a deal-breaker. Also, half of the company’s stock has to be available to the public with the stock price being at least $1 per share. It must prove its underlying financial strength too, at least 4 consecutive quarters that show positive earnings.
If the company is not listed on a major stock exchange, like the New York Stock Exchange or the NASDAQ, it’s not getting in! If the company does not have a market capitalization of at least $8.2 Billion, you guess it.
You’re probably wondering what market capitalization is in the first place…
Let me tell you.
Market capitalization or market “Cap” is what the company value is. The formula to get that number is pretty simple.
You multiply the total number of shares that are outstanding by the stock price at the time of your calculation.
Time for some math?
Let’s say a specific company has 4 million shares outstanding, and the stock price is $16 dollars, this would mean that the market cap would be 64 million.
What are the 11 S&P 500 sectors you mentioned???
Good memory! Unlike the Dow Jones which only covers 9 sectors, the S&P 500 covers 11 sectors in direct proportion to the actual size of the sector in the economy at large.
This is how the S&P 500 is broken down into sectors (as of 12/31/21):
- Information Technology: 27.6%
- Health Care: 13.5%
- Consumer Discretionary: 12.7%
- Communication Services: 10.8%
- Financials: 10.4%
- Industrials: 8.4%
- Consumer Staples: 6.5%
- Utilities: 2.8%
- Materials: 2.6%
- Real Estate: 2.4%
What does this mean for the S&P 500’s overall performance??
Great question, thought you’d never ask!
In order to know exactly how each company impacts the overall performance of the S&P 500, you would have to basically break into Standard & Poor’s secret drawer (electronic vault at this point) to know the “divisor” number they use.
However, we can understand the logic behind how it works.
If market capitalization is the total number of outstanding shares multiplied by the current stock price of a company, and then we know that for example, we are talking about Apple, we know that Apple is part of the largest sector that makes up the S&P 500. 27.6% of it to be exact.
Well, at that point we know that any change in Apple stock would make a very big impact on the overall performance of the S&P 500 given the market cap and the sector “weight”
The obscure “divisor” number comes into play though because of course, just like any restaurant, they need their secret sauce to make a recipe its own. Otherwise, anyone can take Standard & Poor’s place, right?
So…every one of the 500 companies gets a weighting by Standard and Poor by dividing each of the company’s market capitalization by the total S&P 500 market capitalization. We call that secret total the “weight” of each company.
I think that last part is what makes the S&P 500 seem a bit scary and foreign but we can figure most things out by thinking logically about it. At least that’s what I think. I also use this narrative with things like tax laws and stuff like that.
Here are the current 10 highest S&P 500 “weighted” stocks
- Apple Inc. (because of course- you are probably reading this on your iPhone)
- Microsoft Corporation
- Amazon.com Inc.
- Facebook Inc. Class A
- Alphabet Inc. Class A
- Alphabet Inc. Class C
- Berkshire Hathaway Inc. Class B
- JPMorgan Chase & Co.
- Tesla Inc.
- NVIDIA Corporation
So with all this, as always, I like to point out little things right.
If you hate Tesla (I don’t know maybe you hate Tesla??), you can’t invest in an S&P 500 index fund and NOT own some piece of Tesla. Does that make sense?
Another situation that comes up is environmentally friendly investments or faith-based investing. You don’t get to pick and choose out of the 500 companies in the S&P 500.
Now that you understand the different aspects of the S&P 500 it will be easier to understand its performance over the years.
<a href=’https://www.macrotrends.net/2526/sp-500-historical-annual-returns’>S&P 500 Historical Annual Returns</a>
To wrap this post up, today you learned what the S&P 500 is, you learned where you can buy into the S&P 500, you also learned how to figure out how much of it should make up your portfolio.
We talked about the S&P 500 eligibility criteria, the 11 sectors, and the weighted average of each company.
Most importantly, you learned about the historic performance and why the S&P 500 is relevant to you.
As always, if you need any additional information or additional help with any of this, we are happy to help.
Reach out to us here!