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Investing in the stock market can sometimes be daunting. There are countless stocks to choose from, and investing in the wrong place can cost you a lot of money.
Exchange-traded funds (ETFs) are a simpler and more affordable way to invest, perfect for beginners and those looking for low-effort investing. An ETF is a basket of securities combined into a single investment. So when you invest in one stock of an ETF, you’re actually investing in dozens or hundreds of stocks at once.
The S&P 500 ETF is S&P500 (^GSPC 1.23%) Since it is an index itself, it includes the same stocks as the index and aims to reflect their performance. While there are several good reasons to invest in this type of ETF, there’s also one reason you might want to avoid it.
Image source: Getty Images.
Why invest in S&P 500 ETFs?
1. Requires little effort on the user’s part
Investing in individual stocks takes a lot of time and effort and can be expensive. A well-diversified portfolio will contain at least 25 to 30 stocks from various industries. You should thoroughly research any company you are considering buying and stay up to date with the latest news and industry trends to decide whether to hold or sell your shares.
With ETFs, you don’t have to guess where to buy because all the stocks are already selected for you. Specifically, the S&P 500 ETF includes approximately 500 stocks from multiple industries, allowing you to instantly create a diversified portfolio with a single investment.
Additionally, the S&P 500 itself includes only the stocks of the most powerful companies in the United States. If a company does not meet the index’s high criteria and is removed (new stocks are added in its place), your investment will be automatically updated. In other words, you don’t need to do anything, just invest continuously and let the fund do the rest.
2. We have a long and perfect track record
The S&P 500 itself has a decades-long history of recovering from every recession, market crash, and bear market it has faced. In fact, research shows that as long as you take a long-term view, you’re likely to make money with S&P 500 ETFs no matter when you invest.
Crestmont Research experts examined the S&P 500’s rolling 20-year total return to determine how often the S&P 500 Index earns positive returns. They found that all of his 20-year periods in the index’s history ended with positive total returns. This means that no matter when you invested, you would have made a profit if you held your investment for 20 years.
In other words, it has proven more difficult lose It’s less about making money and more about making money on the S&P 500. There are never any promises when it comes to the stock market, but the S&P 500 ETF comes as close to a guaranteed long-term return as you can get.
Why avoid S&P 500 ETFs?
1. You cannot earn above average profits.
Perhaps the biggest drawback of the S&P 500 ETF is its inability to earn above-average returns.It is designed as follows to follow That’s not possible because it’s a market. beat market.
That doesn’t mean you can’t make a lot of money with this type of investment. But if you can build a customized portfolio filled with high-performing stocks, you could potentially earn much more over time.
Historically, the market itself has earned an average annual return of about 10%. For example, let’s say you invest in the S&P 500 ETF and earn an average annual return of 10%. In another scenario, let’s say you invest in individual stocks and earn a slightly higher average annual return of 13%. In either case, if you’re investing, say, $200 a month, here’s how your savings will grow over time.
| years | Total portfolio: Average annual return 10% | Total portfolio: Average annual return 13% |
|---|---|---|
| Ten | $38,000 | $44,000 |
| 20 | $137,000 | $194,000 |
| 30 | $395,000 | $704,000 |
| 40 | $1,062,000 | $2,433,000 |
Data source: Author calculations via investor.gov.
For many people, the average return is worth sacrificing for the ease and simplicity of the S&P 500 ETF. Not everyone has the time or interest to invest in individual stocks, and that’s okay. But if you’re serious about building a portfolio that beats the market, the S&P 500 ETF may not be the best choice.
The S&P 500 ETF is a great option for those looking for a low-effort, low-risk investment that will help them build significant wealth over the long term. However, this may not be the right option for everyone, so you can consider your own goals and preferences and decide whether to include it in your portfolio.
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