The most versatile investor Warren Buffet, in an interview, said that passive investment, such as an index fund S&P 500, “makes the most sense practically all of the time”. In this inclusive guide, we are going to share the details on why and how to invest in S&P 500 index fund
Index investing has always been one of the most popular methods in the stock market. They are easy, diversified and outperforms even the most actively managed funds. When investors buy an index fund, they get a package of selected stocks in one bundle, instead of investing in each one of them individually. Historically, one of the most well-known and successful index funds is the S&P 500.
The rising popularity of the S&P 500 index has resulted in dynamic options available for investors to dip their toes in. For example, if you are based in UK, you can even choose to do leveraged trading of an index fund with a platform like enon. There are a number of other alternatives available for investing in S&P 500 index fund
But, before we dig deep on how to invest in S&P 500 index, let’s understand the basics of this index fund and also the reasons for its recognition as one of the best methods for passive investment.
S&P 500 Index
The S&P 500 index can build a strong foundation for your portfolio. S&P stands for Standard and Poor, while 500 stands for the number of companies that are a part of the index. So, basically, the S&P 500 index is a collective stock market index of 500 largest US companies in terms of market capitalization.
The collection includes the widely held stocks on the New York Stock Exchange (NYSE) and NASDAQ. The companies, based outside of the U.S, are also included in the S&P 500 index, however, they must be listed on NYSE or NASDAQ.
Furthermore, as the index tracks the stocks of 500 largest stocks, in a way, it represents the performance of the entire stock market. But, then why invest in the S&P 500? Why not invest in only the best stocks of the 500 companies?
- Diversification- First and foremost, with S&P 500, you get a chance to diversify your portfolio. It comparatively lowers the risk associated with the poor performance of some of the companies.
- Collective Companies- Investing in individual shares requires studying the patterns and analyzing the charts. Investing in this index fund, allows you to invest own hundreds of different company stocks, without the hassle of investing in each individual ones.
- Lower Costs- The S&P index are comparatively lower costs as they have to be managed passively. Further, by reducing the pointless work and expenses of individually managed shares, thereby resulting in reduced costs.
- Consistent Performance- Historically, the index has always witnessed a return of 10% on the investment portfolio. Statistically speaking, the index funds have consistently performed in the past 10 years.
Naturally, the first question that comes to your mind is: How to invest in S&P 500 index?
How to Buy S&P 500
The Exchange Trade Funds or ETF’s track the performance of S&P 500 index. Now, there are dozens of S&P 500 ETF’s available out there. So, how do you choose the right one?
Let’s take one by one steps on how to buy S&P 500.
Step 1: Find Your S&P 500 Index Fund
Even if you are a beginner, choosing the right index fund is fairly easy.
See, anyways one index fund will have the same stocks as the other traded fund because it is based on the same index (S&P 500). So, naturally, you will go for the one that charges lower. For this, you need to look at the expense ratio to know whether the fund is cheap or not. The expense ratio is basically the cost of the fund manager, for one year, to own your index.
For further analysis, you can also look at the trading costs and Yield and Return figures for the S&P 500 ETF. Commonly known ETF’s include SPDR S&P 500 ETF and Vanguard S&P 500 ETF
Nevertheless, index investing has a cheaper expense ratio as compared to other investments, no matter which method you choose.
Step 2: Choose Your Method
There are a number of different ways to invest in S&P 500 funds through banks, brokerage account, leveraged trading, financial advisor and robo advisor.
One of the simpler options available to invest in an S&P 500 is the banks. It allows you to manage the index investment fund account along with other accounts. However, with banks, you will need to pay higher fees as compared to other methods. Additionally, you will not get an advisor who will guide you on which say index fund to go for.
A trading platform can be highly beneficial for those who are familiar with investing in S&P 500 and its mechanism. The advantage of a trading platform is that they charge lower commission fees. However, you don’t have a financial advisor to advise you before investing.
Another advantage of a trading platform is that if it is a CFD broker, like enon in UK, you can also indulge in leveraged trading which can provide you with higher profits from the same investment.
As the name clearly indicates, the financial advisor helps you to build your portfolio for the index fund. For this, he will understand your financial position, your requirements, how much funds do you want to put in and then work on a method best suited for you. However, the service of a financial advisor comes in the ‘premium’ section and hence you will have to put in extra bucks.
This option is comparatively costlier than opting for a trading platform, but simultaneously it also provides you financial advice before dipping your toes in.
A robo advisor does most of the things of a financial advisor but at a fraction of costs lower than a financial advisor. They offer convenience and expertise for your investment portfolio while costing significantly less than a financial advisor. But, you still need to pay in order to access the services of a robo advisor.
Using pre-specified algorithms, this A.I advisor draws out an investment plan of index fund for you.
Once, you have decided how to buy S&P 500 index fund, you can further determine how much can you afford to invest.
Step 3: Determine how much you can afford to invest
Now that you have a clear understanding of how to invest in S&P 500 index, you need to determine the way and the amount that you can put in.
You don’t need to have a bulk chunk of money to begin investing, but you do need to draw a plan. The first step of which is how much can you afford to invest per month in S&P 500 index fund. You will need to add money to the account every month. Further, in order to receive high returns, you need to hold it in for at least 3 to 5 years.
Alternatively, you can also choose leveraged trading in S&P index fund, which can give you higher rewards, The index fund market can give you returns in a longer period. However, if you want to leverage the volatility of index fund you can choose to trade on a platform like enon, in UK, that offers to trade with 50 times leverage. Further, it also brings all the markets including cryptocurrency trading under one platform so you can manage all your investments under one account.
We have given you a brief guide on how to invest in S&P 500 index fund along with various methods. Many-a-times, we are also asked the methods on how to invest in S&P 500 in UK and we would like to inform you that all the steps and methods are valid for UK also.
Naturally, when the greatest investor Warren Buffet vouches for an index fund, they are a great tool for investments. You need to cross the i’s and dot the t’s but, even with a little understanding and funds, you can begin to invest in S&P 500. As history has consistently witnessed, with index funds, your investment value can climb peaks in time.