Is it bad to only invest in S&P 500?
Meanwhile, if you only invest in S&P 500 ETFs, you won't beat the broad market. Rather, you can expect your portfolio's performance to be in line with that of the broad market. But that's not necessarily a bad thing. See, over the past 50 years, the S&P 500 has delivered an average annual 10% return.
The S&P 500 is a well-known stock market index — and a major buzzword in financial news — and investors often wonder how to invest in it. The answer: You can't directly invest in a stock market index, but you can choose investments that mirror or reflect the performance of that index.
The index itself has a long history of earning positive returns over time and recovering from downturns. While there are never any guarantees when it comes to investing, opting for an S&P 500 index fund or ETF is about as close to guaranteed long-term returns as you can get.
Assuming an average annual return rate of about 10% (a typical historical average), a $10,000 investment in the S&P 500 could potentially grow to approximately $25,937 over 10 years.
The bottom line on the S&P 500
But this index does have some shortcomings. Its market-cap weightings may favor some companies, or sectors, over others; the bandwidth doesn't always reflect the entire domestic stock market, and it excludes companies that aren't based in the US.
Once you have $1 million in assets, you can look seriously at living entirely off the returns of a portfolio. After all, the S&P 500 alone averages 10% returns per year. Setting aside taxes and down-year investment portfolio management, a $1 million index fund could provide $100,000 annually.
Time is your most valuable resource when investing, so getting started early is often more important than investing hundreds of dollars per month. With as little as $100 per month, it's possible to build an investment portfolio worth hundreds of thousands of dollars or more while minimizing risk.
Meanwhile, if you only invest in S&P 500 ETFs, you won't beat the broad market. Rather, you can expect your portfolio's performance to be in line with that of the broad market. But that's not necessarily a bad thing. See, over the past 50 years, the S&P 500 has delivered an average annual 10% return.
$10,000 invested in the S&P 500 at the beginning of 2000 would have grown to $32,527 over 20 years — an average return of 6.07% per year.
Returns in the S&P 500 over the coming decade are more likely to be in the 3%-6% range, as multiples and margins are unlikely to expand, leaving sales growth, buybacks, and dividends as the main drivers of appreciation.
What if I invested $1000 in S&P 500 10 years ago?
A $1000 investment made in November 2013 would be worth $5,574.88, or a gain of 457.49%, as of November 16, 2023, according to our calculations. This return excludes dividends but includes price appreciation. Compare this to the S&P 500's rally of 150.41% and gold's return of 46.17% over the same time frame.
Is Investing in the S&P 500 Less Risky Than Buying a Single Stock? Generally, yes. The S&P 500 is considered well-diversified by sector, which means it includes stocks in all major areas, including technology and consumer discretionary—meaning declines in some sectors may be offset by gains in other sectors.
| Investment Return | Future Value of 300,000 in 10 Years |
|---|---|
| 0.5% | 315,342 |
| 0.75% | 323,275 |
| 1% | 331,387 |
| 1.25% | 339,681 |
Disadvantages of Using the S&P 500 as a Benchmark
Also, the index contains only larger market-cap companies from the U.S.4 In contrast, investors may own small-cap or foreign companies in their portfolios. Using the S&P 500 as a benchmark may be an inaccurate measure of portfolio return for individual investors.
S&P 500 index funds are safe, hassle-free investments. However, there are a couple of serious drawbacks to consider before you buy. Considering your investing priorities can help you decide whether this is the right investment for you.
Disadvantages include the lack of downside protection, no choice in index composition, and it cannot beat the market (by definition). To index invest, find an index, find a fund tracking that index, and then find a broker to buy shares in that fund.
Over its history, the S&P 500 has generated an average annual return of 9%, including re-invested dividends. At that rate, even a middle-class income is enough to become a millionaire over time.
Diversification is an important factor, and you'll want to balance having too much in one type of asset. For example, many experts recommend having an allocation to large stocks such as those in an S&P 500 index fund as well as an allocation to medium- and small-cap stocks.
As noted above, the average rate on savings accounts as of February 3rd 2021, is 0.05% APY. A million-dollar deposit with that APY would generate $500 of interest after one year ($1,000,000 X 0.0005 = $500). If left to compound monthly for 10 years, it would generate $5,011.27.
| Discount Rate | Present Value | Future Value |
|---|---|---|
| 5% | $1,000 | $1,628.89 |
| 6% | $1,000 | $1,790.85 |
| 7% | $1,000 | $1,967.15 |
| 8% | $1,000 | $2,158.92 |
What will $100 dollars be worth in 20 years?
| Discount Rate | Present Value | Future Value |
|---|---|---|
| 27% | $100 | $11,914.46 |
| 28% | $100 | $13,937.97 |
| 29% | $100 | $16,285.24 |
| 30% | $100 | $19,004.96 |
A well-constructed dividend portfolio could potentially yield anywhere from 2% to 8% per year. This means, to earn $3,000 monthly from dividend stocks, the required initial investment could range from $450,000 to $1.8 million, depending on the yield. Furthermore, potential capital gains can add to your total returns.
They also believe that the Federal Reserve will be careful not to raise interest rates too quickly, which could slow down economic growth. As a result, they expect the S&P 500 to grow by an average of 10-12% per year over the next five years.
The historical average yearly return of the S&P 500 is 9.69% over the last 20 years, as of the end of December 2023.
The greater a portfolio's exposure to the S&P 500 index, the more the ups and downs of that index will affect its balance. That is why experts generally recommend a 60/40 split between stocks and bonds. That may be extended to 70/30 or even 80/20 if an investor's time horizon allows for more risk.
