What is The S&P 500 And Why Should You Care

Before I start this post, I want to preface it by saying that this information may be basic for some people. And, that's okay with me. I aim to educate women who may not have had the opportunity to learn much about finances. Starting with the basics is crucial, so let’s go.

People often talk about “the stock market.” They mean the U.S. stock market and the stocks in the S&P 500. The S&P 500 Index represents shares of 500 stocks. They span various sectors of the U.S. economy, including Technology, Financial Services, Healthcare, Communication Services, Industrials, Consumer Stocks, Energy, Real Estate, Utilities, and Basic Materials. The top ten stocks in the S&P 500 currently are Microsoft, Nvidia, Apple, Amazon, Meta (Facebook), Alphabet (Google), Broadcom, Berkshire Hathaway, and Eli Lily. Yes, the index is very tech-heavy right now. This is because it is market-cap-weighted. Many investors own these tech stocks, and the stock prices are high.

Buying shares in an S&P 500 index fund is like purchasing a stake in the broad U.S. economy.

You should care. Buying shares in the S&P 500 has historically been a good way to fight inflation and build wealth. Over the past twenty years, the total annualized return (with dividends reinvested) has been 10.52 %. To illustrate, let's say you inherited $50,000 from your grandmother in 2004 and invested it in an S&P 500 mutual fund. After you invested it, you let the quarterly dividends reinvest into more shares. Then you stopped thinking about it. That $50,000 would be worth approximately $369,000 today.  

It sounds simple, but it isn’t. Why? Because the 10.52 % is the average annualized return. The key word is average. During those 20 years, the S&P 500 had years where the decline was -38.4% and gained as much as 29.6% in others. Many investors can't stand losses. They lack the fortitude, patience, or knowledge to wait. Scientists in behavioral fields coined the term "loss aversion." meaning that people experience losses more intensely than gains of the same magnitude. It describes people’s strong emotional response to losses. In other words, the pain of losing is about twice as powerful psychologically as the pleasure of gaining. So, instead of waiting for the magic of compounding returns over twenty years to do their work, they bail out of their investment.

To avoid bailing out at the wrong time, financial advisors often recommend diversification. It reduces risk. This means spreading your investments over various asset classes. These include other stock indexes, bonds, and cash, as well as the S&P 500. Then, the holding period isn't quite so bumpy, and you are more likely to stay invested.

Disclaimer: This information is for educational purposes, not investment advice. Please consult your financial advisor or conduct additional research. Ensure that any investment aligns with your risk tolerance and timeframes.