- Dividend Rookie
- Posts
- The S&P 500 Story
The S&P 500 Story
Building Wealth with America's Top Companies
Trevor B
May 17, 2024
Summary
Welcome back, fellow rookie investors!
Today, we will go over a quick crash course on the S&P 500, the heavyweight champion of the stock market!
Brief History
The S&P 500's journey began in 1920s when the stock market was booming, and investors were looking for a reliable way to track its performance. In 1926, Standard & Poor's, a financial services company, introduced the S&P 90, which included 90 companies carefully chosen to represent different sectors of the economy. As the market evolved, so did the index, and this eventually led to the expansion of the index, including in total 500 companies and becoming the gold standard for measuring the health of the U.S. stock market.
Metal bull on Wall Street | Source: USA Today Money
Choosing the Companies
Getting into the S&P 500 isn't easy. The selection process is rigorous and based on several criteria. First and foremost is market capitalization, which measures a company's total market value, and liquidity, or how easily a stock can be bought or sold, is also essential. The committee aims for a balanced representation across different industries to ensure the index reflects the broader economy. Additionally, if a company's financials are looking shaky or it encounters legal trouble, it could be removed from the index. The S&P is made out of the 500 biggest US companies in terms of market capitalization and when one is performing bad and falls under the required criteria, the next in line replaces it. This ensure that in the longterm, the S&P maintains a positive trajectory.
Why the Big Deal?
Joining the S&P 500 isn't just a badge of honor—it's a game-changer for companies. Being part of this club brings increased visibility, credibility, and prestige. Investors and analysts closely follow S&P 500 companies, making it easier for these firms to attract capital and talent. Additionally, inclusion in the index often leads to a surge in stock prices as investors rush to buy shares of the newest members. It's like getting a VIP pass to the hottest party on Wall Street!
Graph of the S&P 500 returns since 1930 | Source: Macrotrends.com
Performance Check
When it comes to numbers, the S&P 500 has a track record that speaks for itself. Despite occasional bumps in the road (like the dot-com bubble), the index has delivered impressive returns over the long term. From double-digit gains in bull markets to weathering the storm of bear markets, the S&P 500 has consistently rewarded patient investors who stay the course. However, it's important to remember that past performance is no guarantee of future results.
Investing always carries risks, and it's crucial to do your homework, diversify your portfolio, and seek professional advice if, and when needed. So, while the S&P 500 may be a shining star in the financial world, it's up to you to navigate the investing universe wisely and make informed decisions that align with your financial goals.
Investing In The S&P 500
When it comes to investing in the S&P 500, two ETFs stand out as crowd favorites:
The VOO, also known as the Vanguard S&P 500 ETF, is a popular choice for investors in the United States. With its low expense ratio and large asset base, VOO offers a cost-effective way to gain exposure to the entire S&P 500 index.
Across the Atlantic, European investors have their own version:
The VUSA, the Vanguard S&P 500 UCITS ETF provides easy access to the S&P 500's top-performing companies, helping European investors diversify their portfolios and tap into the growth potential of the U.S. stock market.
In a previous episode, we talked about how to start investing in this ETF using the Trading212 app. If you haven’t checked it out yet, I recommend you do to fully understand the mechanics of this ETF.
And this wraps it up! Today’s episode was a “shorter than ususal” one, but necessary to understand as it’s one of the most effective strategies to use. I hope you've enjoyed diving into the world of Wall Street's most iconic index and I hope you gained some valuable insights along the way. Remember, understanding the S&P 500 is like having a compass for navigating the stock market's highs and lows—it's an essential tool for every investor's toolkit.
Join me next week as we embark on the famous Magnificent 7, one of the most legendary approaches to building wealth in the stock market. Keep smiling, keep learning, and I'll catch you next time!
Trevor
Disclaimer: This post is NOT financial advice. It is intended for educational purposes only. Investing involves risks, and there is a possibility of losing capital. Always conduct thorough research and consider consulting with a financial advisor before making any investment decisions. Your financial well-being is important, so please invest responsibly.
Useful Links
Be sure to check the following website, where you'll find various links to the apps and websites I use daily. All these resources are free to use, and by utilizing my links, you'll not only support Dividend Rookie but also elevate your financial game to new heights!
Check it out HERE!
Join the Rookie Community today by hitting subscribe! It's totally free and motivates me to continue releasing the weekly “episodes”.