Investing can sometimes feel like gambling at a Las Vegas Casino. You buy the hot fund, it goes up, then crashes down, causing you to lose money. So you switch funds, only to have your new fund do the same thing as your last fund. What is happening to your retirement nest egg? All you want to do is get good returns and not lose money the investment you made. How hard can it really be to achieve something that seemingly simple? This is a very common thing that happens to many investors, whether the fund they own is a taxable or tax exempt fund. The S&P 500 is the solution to this problem and will always, over time, give you some of the best returns on earth.
How old is the S&P 500 and what is its origin?
The S&P 500 is considered an index fund that invests almost solely in U.S.-based companies. The Standard and Poor was originally created in the year 1923. Back then it was known as the S&P 90. For over two decade it stayed that way, until it was finally changed in the year 1957 to the format we all recognize, the S&P 500.
What is the S&P 500?
The S&P 500 is a collection of 500 companies from a diverse range of industries representing roughly 70% of all publicly traded stocks, a selection committee is utilized to determine which companies will be part of the index. The companies the committee selects are representative of the publicly-traded industries in the United States economy based on criteria like market size, liquidity, sector representation and other components as well.
Why is the S&P 500 so consistent and successful?
What makes the S&P 500 index to unique is that it doesn't presume to have greater wisdom than the collective market, but instead tries to channel the markets' wisdom to your advantage. Contrast that to the many mutual, hedge and other types of actively managed funds which are run by money managers, whose sole aim is to beat the general market's yearly performance. They do so by buying and selling individual stocks or other investments in their own unique combinations they decide upon . There are thousands of managers and funds working night and day on this goal of getting your money and trying to outperform the general market. Some really do beat the market each year. Those are the ones who end up getting rave reviews by the media, investment magazines and authors. What you don’t hear about is that nearly all fund managers will fail horribly at consistently beating the market.
How do we know it is so hard for funds to beat the overall market?
In 2006, economist Laurent Barras and Russell Wermers of the University of Maryland and Oliver Scalliet of the University of Geneva, in Switzerland, conducted an in-depth research project to understand how many funds actually beat the market by a statistically significant amount. Their findings were astounding at best. In the year 1990, only 14% of active fund managers were able to beat the market by a statistically significant margin. Basically, that means that there was no evidence that year that they are able to beat the general market's performance. Fast forward 16 years to 2006 and the number of funds had that could beat the market by a statistically significant margin was only 0.6% of all funds. That means, 99.4% of all active funds did not beat the market for their investors.
How well over time has the S&P 500 really done?
History is one of the best ways to tell if an investment is good or not in the long run. Over time, what has the S&P 500 index proven to us that merits us trusting our money and possible future on? To find that, we have to do a little math, which thanks to the computer age, makes it very simple. The way to determine the returns on an annual basis that is useful to us is by using something called, CAGR or compound annual growth rate. Basically, it allows us a more accurate way of determining what the yearly return on a stock or investment is so that it cannot be misleading from returns that are highly erratic.
The S&P 500 as we know it today started in 1957 and consisted as basically the U.S. stock market as a whole. A very wise group of individuals came together and gathered all the necessary information from the past to help calculate what your returns would have been starting in 1871 in the general stock market. This is valuable because the S&P 500 mimics the returns of the general market, so getting this historical information allows us to project what returns from the past would have been in index. Here is how you would have fared in different time periods if you had invested in the S%P 500. Of course, some of the periods would have been impossible to invest in, but they show a pattern that is important to notice, the consistency of the general market's growth.
The S&P 500 as we know it today started in 1957 and consisted as basically the U.S. stock market as a whole. A very wise group of individuals came together and gathered all the necessary information from the past to help calculate what your returns would have been starting in 1871 in the general stock market. This is valuable because the S&P 500 mimics the returns of the general market, so getting this historical information allows us to project what returns from the past would have been in index. Here is how you would have fared in different time periods if you had invested in the S%P 500. Of course, some of the periods would have been impossible to invest in, but they show a pattern that is important to notice, the consistency of the general market's growth.
1871-2009 Annual Return Per Year was 6.68%, $1 invested then is worth $7,166 today.
1900-2009 Annual Return Per Year was 6.28%, $1 invested then is now worth $810.
1925-2009 Annual Return Per Year was 6.79%, $1 invested is now worth $267.18.
1945-2009 Annual Return Per Year was 6.81%, $1 invested then is now worth $72.58.
1965-2009 Annual Return Per Year was 4.73%, $1 invested is worth $8 today.
1975-2009 Annual Return Per Year was 7.34%, $1 invested is now worth $11.92
1995-2009 Annual Return Per Year was 5.47%, $1 invested then is now $2.22
2000-2009 Annual Return Per Year was -3.42%, $1 invested then is now worth $0.71
2003-2009 Annual Return Per Year was 2.88%, $1 invested is now worth $1.22
What can be observed from the above data is that over time, an investor can expect to get a 5 to 6 percent a year annual return using the index. There will be ups and downs in the market, but in the end, over time, the index will provide solid, consistent returns.
Taking the data above and more, I did the following three analysis’s. If at a randomly selected starting time period between 1871-2009, you invested for 25, 40 and 50 years, how would you have fared? The reason we chose those time intervals is, most people who save for retirement do so for 25, 40 or 50 years. If you had put all your money into the S&P 500 for that long, what would you have to show for it at the end? After 25 years, on average, you would have returned 6.83% per year. You would have returned 6.61% per year after 40 years and 6.47% annually after 50 years. Those returns are pretty consistent and reliable over time. Almost no fund manager can give you that type of performance over your entire life. This means, instead of putting your money in a fund that will over time, not outperform the market, you should just buy the S&P 500, hold on to it and in 25, 40 or 50 years you will have earned the most you possibly could. Your only job with this new strategy is to find ways to put more money into your S&P 500 investment since you know over time it will grow.
Taking the data above and more, I did the following three analysis’s. If at a randomly selected starting time period between 1871-2009, you invested for 25, 40 and 50 years, how would you have fared? The reason we chose those time intervals is, most people who save for retirement do so for 25, 40 or 50 years. If you had put all your money into the S&P 500 for that long, what would you have to show for it at the end? After 25 years, on average, you would have returned 6.83% per year. You would have returned 6.61% per year after 40 years and 6.47% annually after 50 years. Those returns are pretty consistent and reliable over time. Almost no fund manager can give you that type of performance over your entire life. This means, instead of putting your money in a fund that will over time, not outperform the market, you should just buy the S&P 500, hold on to it and in 25, 40 or 50 years you will have earned the most you possibly could. Your only job with this new strategy is to find ways to put more money into your S&P 500 investment since you know over time it will grow.
To learn more about the S&P 500 and long term investing strategies you should purchase the following books from the Amazon links below.
