People walk through the Financial District near the New York Stock Exchange (NYSE) on the last day of trading for the year on December 29, 2023 in New York City.
Spencer Platt | Getty Images
For investors who want to get in on the action, the good news is that investing in a fund that tracks the S&P 500 is an accessible strategy.
But experts say it’s also worth a word of caution: Past performance is no indication of future returns. And while the S&P 500 was the clear winner in 2023 — ending the year up 26%, including earnings — this may not be the strategy that emerges at the end of 2024.
The S&P 500 includes about 500 large-cap stocks. The index is a market capitalization-weighted index, which means that each company’s weighting is based on its market capitalization, or the total value of all outstanding shares.
Top companies by weight include Apple, Microsoft, Amazon, Nvidia, Alphabet (with two share classes), Meta, Tesla, Berkshire Hathaway, and JPMorgan Chase.
The information technology sector represents the largest sector, accounting for 28.9% of the index. The recent rise in major technology names has helped push the index to its recent highs.
Today, investors can choose from mutual funds or exchange-traded funds that track the index. Among the largest ETFs are: SPDR S&P 500 ETF Trust, iShares Core S&P 500 ETF, and Vanguard S&P 500 ETF.
In 1975 Vanguard created the first index mutual fund tracking the Standard & Poor’s 500. Vanguard’s founder, John Bogle, was a proponent of investing in a broad index fund.
“Just buy an S&P 500 index fund or a total stock market index fund,” Bogle wrote in his book “The Little Book of Sound Investing.”
“Then, once you buy your shares, get out of the casino — and stay out,” he wrote. “Just hold the market portfolio forever.”
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For stock investors who want to keep their strategies simple, experts say this approach can work.
“One of the best decisions people can make is to start with an index-based fund that tracks the S&P 500 because it works,” Todd Rosenbluth, head of research at VettaFi, recently told CNBC.com.
Over time, passive strategies have shown better returns than actively managed funds. Moreover, the cost of these funds is much lower compared to active strategies. And it’s hard to beat this combination together.
“I don’t think individual investors or money managers can generally outperform the S&P 500,” said Ted Jenkin, a certified financial planner and CEO and founder of oXYGen Financial, an Atlanta-based financial advisory and wealth management firm. Jenkin is also a member of the CNBC FA Board.
The more exposure a portfolio has to the S&P 500, the more the ups and downs of that index will affect its balance.
That’s why experts generally recommend a 60/40 split between stocks and bonds. This can be extended to 70/30 or even 80/20 if the investor’s time horizon allows for more risk.
Furthermore, exclusive investment in the S&P 500 on the stock side of the portfolio may be limited if other areas of the market prove successful in 2024.
In 2023, the S&P 500 is up about 26% for the year, outperforming other strategies such as a U.S. small-cap stock index fund or an international stock index fund, noted Brian Spinelli, a certified financial planner and co-head of investing at Halbert Hargrove Global. Advisors in Long Beach, California, which ranked eighth on CNBC’s FA 100 list in 2023.
It can be tempting to ditch those other strategies and jump to the strategy that performed well last year, Spinelli noted.
“But I wouldn’t go any further,” Spinelli said. “You shouldn’t be 100% US capitalized and leave it there and expect the same level of returns that we’ve seen over the last five years.”