People walk through the financial district of the New York Stock Exchange (NYSE) on the last day of trading for the year on December 29, 2023 in New York City.
Spencer Platt | Getty Images
For investors looking to get in on the action, the good news is that investing in a fund that tracks the S&P 500 is an easily accessible strategy.
But experts say it also warrants caution: past performance is not indicative of future returns. And while the S&P 500 was a clear winner in 2023 — ending the year up 26%, including dividends — it may not be the strategy that comes out ahead in late 2024.
The S&P 500 includes about 500 large-cap stocks. The index is a market capitalization weighted index, meaning that each company’s weight is based on its market capitalization, or the total value of all outstanding shares.
Top companies by weight include Apple, Microsoft, Amazon, Nvidia, Alphabet (with two share classes), Meta, Tesla, Berkshire Hathaway and JPMorgan Chase.
Information technology represents the largest sector at 28.9% of the index. A recent rally in big tech names helped propel the index to its recent highs.
Today, investors can choose between mutual funds or exchange-traded funds that track the index. Among the largest ETFs are: SPDR S&P 500 ETF Trust, iShares Core S&P 500 ETF and Vanguard S&P 500 ETF.
In 1975, Vanguard created the first index mutual fund that tracked the S&P 500. Vanguard founder John Bogle was a noted proponent of broad index fund investing.
“Just buy a Standard & Poor’s 500 index fund or a common stock market index fund,” Bogle writes in his book, The Little Book of Common Sense Investing.
“Then, after you’ve bought your shares, get out of the casino — and stay out,” he wrote. “Just hold the market wallet forever.”
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For stock investors who want to keep their strategies simple, experts say the approach can work.
“Among the better decisions people can make is to start with an index-based fund tracking the S&P 500, because it works,” Todd Rosenbluth, head of research at VettaFi, told CNBC.com recently.
Over time, passive strategies have shown better returns than actively managed funds. Moreover, the cost of these funds is much lower compared to active strategies. Together, this combination is hard to beat.
“I don’t think individual investors or money managers in general can beat the S&P 500,” said Ted Jenkin, a certified financial planner and CEO and founder of oXYGen Financial, an Atlanta-based financial advisory and wealth management firm. Jenkin is also a member of the CNBC FA Council.
The greater the portfolio’s exposure to the S&P 500 index, the more the ups and downs of that index will affect its balance sheet.
That’s why experts generally recommend a 60/40 split between stocks and bonds. This can be extended to 70/30 or even 80/20 if the investor’s time horizon allows for more risk.
Additionally, the portfolio’s equity investment exclusively in the S&P 500 could be limiting if other areas of the market perform better in 2024.
In 2023, the S&P 500 is up about 26% for the year, outperforming other strategies such as a U.S. small-cap index fund or an international stock index fund, noted Brian Spinelli, certified financial planner and co-chief investment officer at Halbert Hargrove Global Advisors in Long Beach , California, which was No. 8 on CNBC’s 2023 FA 100 list.
It can be tempting to throw out those other strategies and just go with the one that performed very well last year, Spinelli noted.
“But I wouldn’t overdo it,” Spinelli said. “You shouldn’t be 100% US large cap and let it sit there and expect the same level of returns that we’ve seen over the last five years.”
