Demystifying the S&P 500

By Brett Gottlieb

If you pay attention to what’s going on in the financial world, you’ve likely heard references to “the market.” While the market is made up of thousands of companies in the U.S., what most people, even outside of the financial world, are referring to is something called the S&P 500.

The Standard and Poor’s 500 Composite Stock Price Index, or S&P 500, measures the performance of the 500 top-performing companies across the 11 market sectors, which make up roughly 80% of the value of the entire U.S. stock market. The S&P 500 is the primary tool for monitoring the performance of U.S. stocks, and investors typically use it to determine the overall health of the stock market.

Even if you are well-versed in the stock market, do you really know what the S&P 500 does or how it can be applied to your portfolio? While you don’t need to know everything about the index, a little knowledge goes a long way in making a significant difference in your financial planning journey. This article helps demystify the S&P 500 by looking at its background, why it’s important, and ways you may want to include it in your financial planning journey.

What Is the S&P 500?

The S&P 500 is a blend of about 500 major companies in the United States, all rolled into one index. These companies aren’t randomly chosen; rather, they’re carefully selected to represent 11 different sectors of the economy.

Source: Visual Capitalist

Indexes like the S&P 500 act as a sort of snapshot to capture how companies are doing, which gives us an idea of how the overall market is performing. Specifically, the S&P 500 observes the price movements of large-cap U.S. stocks—those belonging to companies with outstanding shares valued at over $10 billion.

By keeping tabs on the S&P 500, you can quickly gauge whether the most significant U.S. stocks are increasing or decreasing in value. That is why the S&P 500 often acts as a crucial metric for evaluating the general well-being of the stock market and, by extension, the broader U.S. economy.

How It Began

The S&P 500 is more than just numbers and tickers—it’s an important record of the market’s past and present. The first version of today’s S&P 500 Index started in 1923 with 233 companies, calculated weekly. By 1926, it had expanded to monitoring 90 stocks daily, and in March 1957, it had evolved to encompass about 500 stocks.

By that time, it had gradually gained traction among investors who were looking for a comprehensive view of the market’s performance. It was aptly renamed the Standard and Poor’s 500, which has continued to this day.

Why It’s Important

Over time, this index has weathered some significant storms: the tech boom (and burst), the housing market crash, and even the recent pandemic-induced volatility. Through it all, the S&P 500 has shown us just how resilient the U.S. economy can be by depicting how companies evolve, expand, and falter in an ever-changing market environment.

Source: HowMuch.net, a financial literacy website

We all know that a glimpse into the rearview mirror can help us learn from the past to shape future decisions. Tracking the S&P 500 can provide valuable insight that leads investors to make informed and forward-thinking investment choices.

How It’s Calculated

The S&P 500’s value isn’t guesswork: it’s calculated based on market capitalization. This involves weighing companies differently based on their total market value.

Simply put, larger companies carry more weight in the index. The method used to calculate the S&P 500 is more than just number crunching; it’s a tool that investors can use to gauge trends and market movements.

How You Can Invest in the S&P 500

Since the S&P 500 is an index and not a company itself, you can’t buy stock in it. But that doesn’t mean you have to exclude it from your portfolio. Because its average annual return sits at about 10 percent (since its inception in 1957), many investors consider it one of the most sought-after and successful indexes in the world. 

Many investors interested in the S&P 500 choose to go with mutual funds or exchange-traded funds (ETFs). These investment vehicles typically include many of the same stocks as the S&P 500 and aim to mimic its performance by holding them in similar proportions. This is a fairly simple, straightforward way to invest in a broad market index.

While it’s possible to purchase shares in each of the over 500 companies listed in the S&P, this option is not very practical for most investors. That’s because it can get very expensive and require a lot of time to manage.

Even if you’re uncertain how the S&P 500 might affect your portfolio, involving a trusted financial advisor can help you make an informed decision.

What Does This Mean for You? 

Now that you know more about the S&P 500 index, how can this information help you? First, it’s important to remember that the S&P 500 is meant to be used as a valuable tool in your investing endeavors. Whether you’re a new or seasoned investor, utilizing the insights from the S&P 500 in your portfolio can lead you to make informed financial choices and give you confidence in your investments.

Even if you’re already familiar with the S&P 500 and how to use it, realizing your financial goals requires a holistic, collaborative approach. That’s where we can help. At Comprehensive Advisor, our mission is to provide personalized financial planning advice through getting to know you and developing a plan that helps you confidently pursue your financial and retirement goals. If you are ready to get started, schedule a visit, email us at info@ComprehensiveAdvisor.com, or call (760) 813-2125 today.

About Our Advisors

Brett Gottlieb is the founder of Comprehensive Advisor and a financial advisor with nearly two decades of industry experience. He graduated from California State University-Chico with two bachelor’s degrees, in business administration and economics, and is Life Insurance licensed in several states. He is passionate about guiding his clients on retirement income planning, helping each client pursue their specific retirement goals, and defending the assets his clients have worked so hard to achieve. Brett is a California native and currently resides in San Elijo Hills with his beautiful wife and three children.

Our team of qualified professionals have experience in the financial service industry, and our advisors hail from some of the largest independent broker/dealers and banking institutions in the country. They have dedicated their professional careers to creating personalized financial strategies for individuals and families who seek successful retirement planning and currently offer investment advisory services through AE Wealth Management, LLC. Our advisors take a common-sense approach to the planning process and work with clients to create a comprehensive retirement roadmap to help ensure their assets are preserved and they receive the income needed to enjoy their future. Based in Carlsbad, California, they work with clients throughout San Diego County and beyond. Learn more by connecting with Brett on LinkedIn or email them at info@ComprehensiveAdvisor.com.

Insurance products are offered through the insurance business C.A. Financial & Insurance Services. Comprehensive Advisor, LLC is an Investment Advisory practice that offers products and services through AE Wealth Management LLC (AEWM), a Registered Investment Advisor. AEWM does not offer insurance products. The insurance products offered by C.A. Financial & Insurance Services are not subject to investment Advisor requirements. CA Ins. Lic. #6000262.

The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market-value-weighted index with each stock’s weight in the index proportionate to its market value. Past performance is no indication of future results. Investing involves risk and the potential loss of principal. This article is meant to be general and is not investment or financial advice or a recommendation of any kind. Please consult your financial advisor before making financial decisions. For more detailed information, contact a financial advisor with Comprehensive Advisor, LLC. offering investment advisory products and services through AE Wealth Management, LLC. 2406625 – 5/24