How to Invest in the S&P 500

If you’ve ever read about investing, you’ve probably heard the term diversification.

In fact, you probably heard this many…

As you can imagine, this is quite an important factor for investing. After all, diversification (in other words, having different types of investments in your portfolio) is how you don’t screw up when the stock market crashes or the real estate deal fails.

Through the S&P 500, you will receive instantaneous diversification and have access to some of the best stocks on the market.

What is the S&P 500?

First, I want to know what the S&P 500 really is. In the stock market, you will find many “indices” which are basically a fund that tracks a specific type of stock, sector, company, etc. Thus, in the case of the S&P 500, it follows the 500 largest public companies. Other well-known indices are the Dow Jones Industrial Average and the NASDAQ.

While you tend to hear the Dow Jones in the news a lot, the S&P 500 is actually the best indicator of overall stock market performance. Since it includes the top 500 companies, experts often use it as a basis for comparing how individual stocks perform against the market.

Many people don’t realize how small the NASDAQ and Dow Jones really are. The NASDAQ is actually called the NASDAQ 100 because it only tracks 100 companies (many of which are technology stocks). The Dow only tracks 30 companies.

S&P 500 companies weight rating

Below, I’m going to list some of the top companies in the S&P 500. This is just to give you an idea of ​​the companies that dominate the top of the list, especially since portfolio weights will change on a daily basis. If you’re interested, you can always look at the full list of companies in the S&P 500.

However, here are some of the top companies in the S&P 500 and their respective portfolio weights:

1. Microsoft Corp. (MSFT) – 6.2%.
2. Apple Inc. (AAPL) – 5.8%.
3. Amazon.com Inc. (AMZN) – 3.7%.
4. Facebook Inc. (FB) – 2.3%.
5. Alphabet Inc. Shares class A (GOOGL) – 2.1%.
6. Alphabet Inc. Shares class C (GOOG) – 2.0%.
7. Berkshire Hathaway Inc. (BRK.B) – 1.4%.
8. Johnson & Johnson (JNJ) – 1.2%
9. Visa Inc. (V) – 1.0%.
10. Procter & Gamble (PG) – 0.9%.

As you can see, you will get access to some pretty popular companies. However, remember that there are 490 other companies in the index, so you are immediately well diversified and you may not need to invest in individual stocks (more on that below).

So how do you invest in the S&P 500?

You cannot invest in the S&P 500 itself, but you can invest in an S&P 500 fund. (index fund, ETF, mutual fund, etc.) that tracks the S&P 500. This means that you will, in effect, own the shares of every single company in the S&P 500.

This way, you don’t have to be limited to buying a few S&P 500 stocks (or more than 500 stocks, which I can’t even imagine), but instead have one investment.

S&P 500 Index Funds

The most common ways to invest in the S&P 500 are index funds and ETFs – both will reflect the S&P 500 index. Index funds and ETFs are similar, but there are minor differences. Index funds will have a higher buy-in and a many times lower expense ratio.

They are also traded like mutual funds, meaning you can only buy and sell them at the end of the trading day.

More details: How to Invest in Index Funds: A Beginner’s Guide

S&P 500 Exchange Traded Funds

On the other hand, ETFs are traded like stocks, and there is no minimum investment (other than the price of the stock itself). You can buy and sell stocks throughout the day. In some cases, ETFs will have higher expense ratios.

Honestly, it all boils down to two things:

1. Your preferences.
2. Where are your investments.

For example, if you have 401 (k)you probably won’t be able to choose an index fund. But there is a good chance there is an S&P 500 ETF.

Beyond that, you should know your preferences. Some people prefer index funds because they are very cheap and you can set them up and forget. ETFs move up and down in price faster because they trade like stocks, so you need to treat them as a whole.…

Either way – you get access to the S&P 500 with both of these types of investments, so it doesn’t matter what you decide.

More details: How to invest in ETFs

How do I buy an S&P 500 Index Fund or ETF?

Investing in the S&P 500 through an index fund or ETF is incredibly easy. In fact, many financial experts advocated that this be the main (if not the only) investment you need.

Here’s how you invest in the S&P 500:

Step 1 – find the index fund or ETF that’s right for you

Finding an ETF or index fund that mirrors the S&P 500 is really easy. Since all S&P 500 funds will hold the same stocks with the same weight, you should pay attention to:

1. Price.
2. Investment firm.

For example, if you are looking for an S&P 500 fund in your 401 (k), you will be limited by the options available. Otherwise, you can choose a brokerage company that works for you and has a family of funds (like iShares) that you want to invest in.

In most cases, the foundation family doesn’t really matter. For example, there may be no difference between Fidelity, iShares, Vanguard, or Blackrock S&P 500 funds. So it all comes down to what is cheaper and what is available to you. (Note that a lot of people love Vanguard, but you don’t have to).

So the only thing you need is look carefully, this is the ratio of costs… The expense ratio is the percentage you pay an investment broker to manage that particular fund. For example, Vanguard’s VFIAX expense ratio is 0.04%, which is absurdly cheap.… This means that for every $ 100,000 you put in, you will pay a measly $ 40 in expenses.

You can even find free index funds right now, or simply include them in the total management cost from your robot advisor. There are many options available to you, so it’s best not to waste a lot of time here. Just pick one that reflects the S&P 500 and has a low cost ratio.

Step 2 – find a good broker

Steps one and two can be reversed as some brokerages do not offer specific funds. But in most cases, you will find what you are looking for (even if it is an ETF version of an index fund, as Vanguard usually does).

So the next step is finding a broker – and again, you need to focus on value. However, depending on your future goals, you want to balance the cost and the tools / resources available.

Getting started with most online brokers now is ridiculously easy: it only takes a few minutes for them to open online, fund an account and start trading.

More details: Best Online Brokerage Accounts for Beginners

Step 3 – determine the amount of your investment and invest

Now that you have chosen an online brokerage account and know which fund you want to buy, you need to figure out how comfortable it is for you to invest. This is a personal decision, but I can tell you that investing even small amounts at an early stage, stretched out over a long period, leads to a high probability of wealth in the future (clever investing is long-term money management!)

This is true the power of the complex… So whatever you decide, don’t overdo it – it’s better to start somewhere than to get analytical paralysis and put your investment aside.

Find your foundation

Then search with your broker to find the fund you want. There is usually an easily accessible search box somewhere on the platform. Click on the ticker (for example, VOO) and you will be taken to a screen that, among other data, displays the fund and its performance.

Decide on the number of shares you want

From there, you set how many shares you want to buy. Please note that if you are buying an index fund, there will most likely be a minimum investment amount. If you do not meet this minimum, you will need to buy the ETF version or find another class of these investments (which usually has a lower buy-in, but a slightly higher cost ratio).

Now submit your deal

Submit your trade from there and you will be the lucky owner of some S&P 500 index fund or ETF stock. Or rather, you now own a share of the 500 largest companies that are publicly traded in the United States.

Now that you’ve made your initial investment, don’t stop. Set up recurring contributions to invest in this fund as often as possible. Some brokers will also allow you to buy partial shares, which allows you to invest more money in the fund and do dollar value averaging… In any case, keep making these contributions so that your money starts to grow.

More details: Explaining dollar value averaging – is it a smart way to invest?

Which S&P 500 funds should I invest in?

Below are a few funds to help you get started investing in the S&P 500.

• SPDR S&P 500 ETF (SPY). It is actually the oldest ETF in the United States since it was originally opened in 1993. It is also the largest ETF with approximately $ 270 billion in assets. The expense ratio is 0.09%.
• Vanguard 500 Index Investor (VFINX) stock class. It is a mutual fund that almost completely reflects the S&P 500 and its weights. It is actively managed, so the expense ratio is higher at 0.14%, but it is worth looking out for if you want people to pull the strings behind your fund.
• Fidelity 500 Index Fund (FXAIX). This is a great index fund (actually a mutual fund) because the expense ratio is only 0.015% – one of the cheapest available. It has also been in existence since 1988 and is operated by one of the largest investment firms, Fidelity.
• State Street S&P 500 Index Fund Class N (SVSPX). This fund has a minimum investment of US $ 10,000 and an expense ratio of 0.16%. However, it has performed well since its inception in 1992 (it posted over 31% in 2019).
• iShares Core S&P 500 ETF (IVV). This is biased, but this is my favorite of all. IVV has been around for a long time and is very cheap (0.04% expense ratio). It is offered through a variety of online brokerage accounts and robot advisors.

Summary

Bottom line: Investing in an ETF or S&P 500 index fund is one of the safest investments you can make. You will get an inexpensive and instant diversification of your portfolio. It also doesn’t hurt that Warren Buffett himself recommended these funds…

Finding a fund, starting an online brokerage company and buying your first batch of stocks is easy and requires little or no research. Then, ideally, you can arrange for a recurring investment and relax while enjoying the long-term returns that we expect to see from the S&P 500 over time.

More details: