It’s one of the most commonly followed stock market indices, probably the most well known one worldwide, which tracks the performance of the top 500 largest companies which have their shares traded on a stock market in the USA. This includes many companies based in other countries, as most large multinational companies are listed on more than one stock market, which in most cases includes at least one of the major USA-based stock exchanges.
The S&P500, also known as simply the S&P (named after Standard & Poor’s, a large corporate credit ratings agency), is a capitalisation-weighted index – basically this means that each component company’s impact on the index performance is weighted according to how much each company is worth; companies of higher value based on their share price have more of an impact on the performance of the index than companies of lower value. Because individual company values rise (and fall) at different rates, being capitalisation-weighted rather than equal-weighted is a much more accurate reflection of the overall state of the economy.
Examples of companies included in the S&P500 are 3M, Accenture, Alphabet (Google), Amazon, Apple, Berkshire Hathaway, Coca-Cola, Disney, Facebook, FedEx, Johnson & Johnson, Marriott, McDonalds, Microsoft, Netflix, Nike, Paypal, Pfizer, Starbucks, and Visa. The chance that anyone reading this has not bought something (or many things) from any of the companies in the S&P500 is basically 0% - chances are, you buy a lot of things from a lot of these companies on a regular basis – and so does everyone else, which is why they are all so huge and so profitable.
By investing in the S&P500 Index, you are becoming a part-owner in all of these companies, and therefore receive part of their profits, paid in the form of dividends, and benefit from their increase in value over time as they continually grow and sell more stuff to all of us.
Investing in the S&P Index has been recommended by a wide range of successful world-famous investors, including Warren Buffett, Burton Malkiel, and John Bogle – and the team at PensionsForNomads :-)
Since inception in 1926 – before the “Great Depression” of the 1930’s, and therefore including that time, as well as other crises such as the “dot-com bubble” of 2000, the global financial crisis of 2008, Covid-19, and many more – the average annual return of the S&P500 has been slightly under 10% per year. This is an average though – it doesn’t go up in a straight line, and on a year to year basis there have been several years where the index has gone up by around 30%, and several years where it has gone down by around 30%. Year-by-year, the value increases 70% of the time, and decreases in value 30% of the time. This volatility, combined with the long-term average return of nearly 10% per year, makes it a bit risky for short term investors, and close-to-perfect for long term investors who are investing on a regular basis, such as making regular monthly investments into a pension plan, and benefitting from dollar-cost-averaging.
The pension plans featured by PensionsForNomads are 100% invested into the S&P500 Index, using the highly regarded and low-cost iShares S&P500 ETF.
For more information on the S&P500 Index, just Google it – you’ll probably get an advert displayed alongside the results, which some company has paid for, which has increased Google’s profits, which ultimately makes the S&P500 Index rise in value a little bit more…