When it comes to the stock market, most people realize that it is like playing poker or Russian roulette. Day trading and trying to time the market are risky. All types of investing in the stock market have some level of inherent risk. The stock market has its highs and lows; its good times and bad times. People make money and lose money, and most people understand that investing in individual stocks or picking certain stocks that will definitely make money is not always a reality. But when it comes to the S&P 500, often people take a different stance, assuming and spouting about how it is such a safe investment. Perhaps. But be aware that there are still risks before blindly buying into what others say about the S&P 500.
There are four major falsehoods that you need to understand regarding the S&P 500. The first and probably the primary one is that the S&P 500 is a safe investment. The fact that it is an investment in the stock market should tell you that there is no assurance that it is “safe.” What does that even mean? I will contend that an index fund like Vanguard 500 Index Admiral share ($VFIAX) is a great investment and a good foundation for many portfolios, but I would never say it is “safe” unless you mean over a long period of time. So if you are thinking about investing in it for 40 years or so, you could probably conclude that it is a fairly secure and prudent investment. However, there can be pretty much volatility in it if you are looking at a shorter time frame. Personally I own stock in the 500 largest companies and feel it is a good investment and addition to my portfolio. But I am also fully aware that there are risks that come with investing in it. Over its history, the Standard & Poor’s 500, shortened to S&P 500 which dates back to 1957 as we know it today as a stock market index, tracking the value of 500 corporations listed on the New York Stock Exchange (NYSE) and on the NASDAQ Composite, has seen a positive year 73% of the time. That means that 27% of that time, since 1957, it has been in the red. But more than that, looking deeper into the statistics of the S&P 500, since it is necessary to take into account volatility, the high point has been 50% or more and the low point has been less than 40% or more. So…going back to the question about whether or not it is “safe,” is quite a subjective question. But there is more to consider with the S&P 500.
The second false notion about the S&P 500 is that the return is below that of other more “exciting” or “flashy” investments like individual stocks. There seems to be an idea that individual stocks yield higher returns. True, false, maybe. There is so much that goes into this idea that there is not a definitive answer. Statistically, from 1926 until 2015, 96% of stocks, collectively, underperformed one-month U.S. Treasury bills. Wow! To me, that is not a great statistic from my financial perspective. Yes, some stocks perform well over the course of time, but the majority of them actually underperform on a large scale. I always advise against timing the market, but with individual stocks, you have to know when to get in and when to get out in order to be financially successful. That is so risky and many lose trying to play that game. This leads us to the next falsehood about the S&P 500.
The third misconception about the S&P 500 is that it only goes up. It is such a part of human nature, especially the part that deals with money, that I only hear the complaint from investors that they thought the S&P 500 was a “good investment” during financially turbulent times. It seems like investors crawl out from nowhere to complain that their S&P 500 fund has lost money. I never hear from anyone when it is up, only complaints when it is down. Newsflash! That is all part of the game of the stock market. Investing is not science and is not a guarantee. Additionally, being down can have benefits if you plan accordingly. How? Think about buying one share and only paying $200.00 compared to having to pay $300.00 for that same share. I want to buy at a lower price, just like going to the store and buying things when they are on sale. Don’t we like sales? Well, think of it as that – a sale. We are able to buy things on sale and save money or maybe buy more. Financially, this is good, if you plan accordingly and plan for the duration. This leads us to the last misconception.
The fourth falsehood is that the S&P 500 takes too long to get rich. This is not necessarily true. Here are a few stats to help disprove this idea. If a twenty-year-old person invested $1000.00 per month for 22.5 years, they would amass $1,000,000.00 at the age of 42 and a half. This is not taking into account any other investing. The average age for a millionaire is 49. So, just think about having a million dollars and not yet even being 43 years old. Perhaps you want things faster than that or more money than that? It is hard to beat the market, and few do. From 2000 to 2021, the AVERAGE investment returned 2.9% while the S&P 500 returned 7.5%. Looking at that in dollars and cents, if a person invests $10,000.00 in 2000, in the twenty years just noted, the average person would have accumulated $17,847.00, but the S&P 500 investor would have accumulated $44,608.00. I personally would rather have the $44,608.00! Plus, when investors lose in the market, they have a lot to make up. Think about this. If an investor has $400.00 but loses 50%, he or she only has $200.00. Ouch! In order to catch up, just to the $400.00, you must recover 100% – not 5-%. In order to recover, you have to increase your gains substantially. Actually, here is what you have to gain in order to recover from your losses:
|Loss||Percentage to Recover|
Obviously, the more you lose, the more you have to gain in order to recover which becomes exponentially more difficult or almost impossible. It is not a game, nor is it something to take lightly. Overall, the S&P 500 can be a sound investment, but it should be one in which you plan on keeping for a duration of time and one that you do not expect to make you an overnight millionaire. Invest wisely and understand what you are doing with your money.
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