The S&P 500 is up over 23% year to date. What you need to know before investing

That performance may now have some investors questioning whether they should allocate more of their money to a fund that tracks the index.

Vanguard’s founder, John Bogle, argues that long-term wealth can be built by owning a low-cost fund that tracks the stock market, such as the S&P 500.

As the name suggests, the S&P 500 includes about 500 stocks (503 to be exact) that fall into the large-cap category. The index was created in 1957 and was the first market capitalization weighted index. This means that the weighting of each company in the index is according to its market capitalization, or the total value of all shares outstanding.

Companies included in the S&P 500 are subject to change. This month, ride-hailing company Uber is among several names joining the index, replacing packaging company Sealed Air Corp.

For investors, passive funds that track the index are widely available.

“The biggest ETFs in the world are the S&P 500 ETFs,” said Brian Armer, director of passive strategies research for North America at Morningstar, an investment research provider.

Investors may also choose to add mutual funds focused on the S&P 500 to their portfolios.

Exchange traded funds are priced and can be traded throughout the day. Mutual fund orders are typically executed once a day, with all investors receiving the same price.

Another key difference between ETFs and mutual funds is cost.

“Our research has shown over the years that price is one of the best predictors of future success,” Armor said. “And ETFs are much cheaper than mutual funds.”

Passive funds that track an index have the advantage of providing much lower costs than active strategies that are professionally managed. Over time, passive strategies have shown better returns.

“Among the better decisions people can make is to start with an index-based fund tracking the S&P 500, because it works,” said Todd Rosenbluth, head of research at VettaFi.

Of course, a strong performance in 2023 may not be indicative of what’s to come in 2024.

As the calendar turns to the new year, pundits are making bets on where markets, including the S&P 500, will land.

A recent CNBC survey of the Federal Reserve found that money managers, strategists and economists surveyed expect the S&P 500 to moderate in 2024, of less than 2% to reach 4,696. On average, these experts also see the S&P rising over 5,000 for the first time, but not until 2025.

HSBC expects the index to reach 5,000 in 2024, with a chance of rising if there is no recession.

Raymond James’ 2024 target for the S&P 500 is 4,850, due to a more conservative outlook than other firms when it comes to earnings, according to Chief Investment Officer Larry Adam.

This news builds on this year’s good news already included in the index, he said.

“Everybody feels better that the Fed is no longer raising rates, they will eventually cut rates, inflation is coming down,” Adam said.

In 2024, however, the firm’s forecast includes a mild recession or slower growth.

Much of the S&P 500’s strong performance this year has been driven by the so-called “Magnificent Seven,” which includes Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla.

Raymond James expects those tech names (with the exception of Tesla, which he considers a consumer company) to continue to be a market driver in 2024, though not as strong as they were this year, Adam said.

“Tech is undoubtedly the one sector that consistently outperforms its earnings by a fairly significant amount,” Adam said.

Financial experts generally say that investing in an S&P 500 index fund is a good strategy — although it leaves room for diversification.

“It can be an effective strategy if you stick with it,” said Douglas Boneparte, a certified financial planner and president of Bone Fide Wealth in New York. Boneparth is also a member of the CNBC FA Council.

Although the S&P 500 index offers exposure to the largest companies, it excludes small or medium-sized companies, as well as international companies, Boneparte noted.

While buying and holding exposure to the S&P 500 can make sense over the long term, investors should be wary of reacting to market movements.

“The main thing would be to strategize and stay invested,” David Rea, president of Salem Investment Counselors, which is No. 27 on CNBC’s 2023 Financial Advisors 100 list, said via email. but down last year. You can’t time the market, so choose funds or ETFs that fit the risk/return profile and stay invested!”

Ted Jenkin, a certified financial planner and CEO and founder of oXYGen Financial, an Atlanta-based financial advisory and wealth management firm, said sticking to low-cost investing and not timing the market can pay off. He is also a member of the CNBC FA Council.

“I don’t think individual investors or money managers in general can beat the S&P 500,” Jenkin said.