Why the S&P 500 remains a popular investment

The S&P 500 is a weighted index of the 500 top US companies. It has become the standard - a benchmark - in gauging large-cap US equities. This is where the likes of Apple, Tesla, Home Depot, and Exxon are listed. 

It doesn’t take long when looking through the best stock broker UK to discover that the S&P 500 is arguably the most common investment. But why is that, and is it justified? 

Historical Returns

Whilst historical performance isn’t a guarantee of future results, it certainly helps build confidence in a portfolio. The S&P 500 has been returning between 10% and 11% on average since 1926. Whilst there have been many peaks and troughs throughout this time, the longevity of being almost 100 years old is profoundly comforting to long-term investors.

The market as a whole has spent many more years in the green than the red, too. This makes lump-sum investors confident in “now” always being the right time to invest, whilst long-term investors see any of the down years as being merely part and parcel of the 20+ year-long investment time horizon.

Warren Buffet Approved

Warren Buffet is one of the most successful and respected investors in the world. We all have heard of him, but what are his opinions on the S&P 500? Buffet is partly responsible for creating many S&P 500 investors because of his positive outlook on the index over the years. 

"For most people, the best thing to do is to own the S&P 500 index fund." Whether or not he is right is beside the point - it’s the public backing of the S&P 500 that contributes to its popularity among retail investors.

Buffet is so confident in the index that he placed a bet in 2008 with Protégé Partners LLC. The bet was that the S&P 500 would outperform the hedge-fund’s hand-picked investments after taking into account fees and expenses, over the next 10 years. Whilst the hedge fund was winning for four years following the 2008 crash, the Buffett-backed S&P 500 won the bet in 2018.

The reason why Buffett recommends index investing mostly boils down to three things: It’s low cost, the alternative (picking out the winners) is more difficult, and compounded returns. Whilst you don’t earn interest from investing in equities, the phenomenon of compounding returns still applies - but just in a yearly context. 

So, a 10% rise in a $10,000 investment would result in $11,000 at the end of year 1, but year 2’s 10% gain would be applied to the $11,000, not the original $10,000, meaning that investment would be worth $12,100 at the end of year 2. This has an exponential quality, meaning that time in the market can have profound returns. Of course, a 10% rise each year is a simplified example, but the S&P 500 index investors believe this is the number one reason behind its success.

Financial Independence, Retire Early (FIRE)

Over the past few years, there has been an increase in not just retail investing but a desire to become financially free - a position where you can retire and live from the portfolio’s earnings. Whilst the S&P 500 does lack some diversification (overexposed to the risk of a US crash), passively investing in low-cost index funds with great track records has become the staple of the FIRE movement - monthly payments and compounding returns over decades of passive investing. There is still nuanced debate around what a portfolio should be constructed of, but the S&P 500 is going to become increasingly relied upon with both experienced and inexperienced investors.