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5 Reasons S&P 500 Index Funds Are Perfect for New Investors

By Katie Brockman - Feb 11, 2021 at 6:30AM

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If you're just starting out, you can't go wrong with S&P 500 index funds.

Investing in the stock market is a great way to make a lot of money, but getting started can be tough. There are seemingly endless options when it comes to choosing where to invest, and investing in the wrong stocks could put your money at risk.

If you're new to investing, though, there's one type of investment that outshines the rest: S&P 500 index funds.

Young woman sitting at a desk, looking at charts

Image source: Getty Images.

What is an S&P 500 index fund?

First, it's important to understand what, exactly, an S&P 500 index fund is. The S&P 500 is a stock market index that includes 500 of the largest companies in the country.

An index fund is a collection of stocks that tracks a particular stock market index. In other words, the index fund will contain whatever stocks are included in the index. So when you invest in an S&P 500 index fund, you're investing in all of the companies in the S&P 500.

S&P 500 index funds can be a great option, especially for new investors. And there are five good reasons to consider this type of investment.

1. You don't need to do lots of research

When you invest in individual stocks, you'll need to thoroughly research each company you're considering. Some stocks are riskier than others, and it's important to make sure the company you're investing in is financially healthy.

When you invest in an S&P 500 index fund, however, you don't need to worry as much about the stocks in the index. The S&P 500 is recognized as one of the best representations of the stock market as a whole, and it has experienced an average 10% annual rate of return since it was founded. With that type of track record, you can rest assured that your investments will see positive returns over the long run.

2. They're one of the most affordable types of investments

When it comes to funds, there are two main types: passive funds and actively managed funds. Actively managed funds have an expert hand-selecting every stock in the fund, while passive investments do not.

Index funds are passive investments because they mirror certain indexes. An S&P 500 index fund contains all of the stocks in the S&P 500 itself, so there's no fund manager choosing which stocks to include. This makes them less expensive than actively managed funds, because you're not paying an expert to pick stocks.

3. They're more likely to recover from market downturns

No investment is immune to risk, and S&P 500 index funds are no exception. However, they're more likely than other investments to recover from market crashes.

The S&P 500 has experienced its fair share of volatility over the years, but it's always been able to bounce back. Over the past 20 years, the S&P 500 has seen the dot-com bubble burst, the Great Recession, terrorist attacks, wars, civil and political unrest, and a global pandemic -- yet it continues to climb.

^SPX Chart

^SPX data by YCharts

It's very likely the market will experience more volatility over the next few years and decades. But if history shows us anything, it's that the S&P 500 will pull through.

4. They provide instant diversification

Diversification is key when investing. That's because the more stocks you invest in, the more likely it is that your portfolio will remain strong even if a few of those stocks don't perform well.

When you invest in an S&P 500 index fund, you're immediately investing in 500 different companies -- all within a single investment. It's always a possibility that some of those companies will take a turn for the worse. But when you're investing in hundreds of stocks, it won't make a significant difference if a few stocks tank.

5. They include stocks from some of the strongest companies in the country

There are many different indexes out there, but the S&P 500 is one of the strongest. That's because only the best and the biggest companies are allowed a spot in the index.

To be included in the S&P 500, a company must meet several basic requirements regarding its size and profitability. If it meets all the requirements, it then must be approved by a committee before it can join the S&P 500.

Some of the biggest companies in the S&P 500 include Apple, Microsoft, Amazon, Facebook, and Alphabet. By investing in an S&P 500 index fund, you'll be investing in all of these companies and more.

Getting started investing can be intimidating, but it's easier than you may think. S&P 500 index funds are perfect for new investors, and they can help you start your investing journey off on the right foot.

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