New investors or those looking for a much more “hands-off” approach to investing often consider putting their money into the S&P 500 index and just leaving it there to create capital gains. While this may be a solution for some investors, it’s certainly not a cure-all for every portfolio, and relying on the index to give your portfolio its main source of value can lead to significantly diminished returns and loss of potential profit. We’re going to take a look at just when it might be smart to drop your money in an index fund and leave it alone, and when it may leave your portfolio floundering for more gains.
What Is The S&P 500 Index?
The S&P 500 index is a managed fund that measures the value of the 500 largest companies listed on the NASDAQ and the NYSE, based on their total market capitalization. The index was created with the aim of providing a one-stop measure of the stock market and the general economy’s overall health. It has historically been one of the most popular ways to gauge economic performance and growth, along with the Dow Jones Industrial Average. The S&P 500 gives an incredibly accurate look at the companies that make up more than three-quarters of the available market capitalization.
Should I Invest Heavily In The S&P 500 Index?
In some cases, putting a significant reliance on the S&P 500 can be advantageous. Situations like this can include those with established investment portfolios who wish to park their cash in a managed fund with reliable growth over time. While it shouldn’t be the sole investment in your portfolio, it can be a consistent way to grow your wealth passively as well as avoid inflationary decay.
Situations where it may not be ideal include investors that desire a more significant return on their investment. While the S&P 500 index does have consistent and reliable growth, it doesn’t provide the aggressive growth that will help drive wealth creation. Those looking to create more significant returns should include the index in their portfolio, it just shouldn’t be the only thing there
What Benefits Does The S&P 500 Have?
There are some significant benefits to investing in the S&P 500. It is a managed fund, so newer investors will not have to worry much about managing stocks for individual companies. This also means that even when there are times of significant market shifts in value, the index will have the greatest potential to weather those corrections, since it is composed of the largest and more resilient publicly traded companies. This makes it a great way to diversify your portfolio.
Are There Drawbacks To Index Investments?
One of the biggest downsides to a “set it and forget it” investment in the S&P 500 is that it is heavily geared toward incredibly big large-cap corporations. The weighting of each company in the fund affects their average market capitalization, which can skew the value of the fund overall. This means that the mega-cap companies in the S&P 500 can often overshadow the smaller ones, occluding their potential performance as well as associated risks.
For More Information On Creating A Diversified Investment Strategy
While putting significant cash into index funds can be a great way to park assets and mitigate inflationary decay, it’s not usually the best way to create an efficient return on that investment. If you’re looking to invest in the S&P 500 index, other managed funds, or other investments entirely, reach out today and speak with a member of the Prevail team.