The S&P 500 (^GSPC +0.26%) is the benchmark most investors use to measure their performance. Why? Because it's more diversified than the Dow Jones Industrial Average, which includes just 30 companies, and the Nasdaq Composite, which focuses on the technology sector.
The S&P 500 is a collection of 500 of the highest quality U.S. companies, and they have to meet a strict set of criteria for inclusion:
- Each company must be listed in the U.S. with at least 10% of its shares available for public trading.
- Each company must have a minimum market valuation of $14.5 billion.
- The sum of each company's earnings (profit) over the most recent four quarters must be positive.
The index has a long track record of success dating back to its establishment in 1957, delivering a positive annual return in 52 of those 67 years.
However, history also proves the longer you remain invested, the higher your chances of earning a positive return. Below, I'll outline two simple steps every investor can take to maximize their potential for stock market gains.
SNPINDEX: ^GSPC
Key Data Points
Step 1: Buy an S&P 500 index fund
Building a portfolio of individual stocks can be a rewarding learning experience, but investors can also buy one of many exchange-traded funds (ETFs) that directly track the performance of the S&P 500. After all, the S&P 500 features almost every stock an investor could want, including the "Magnificent Seven" technology giants, each of which outperformed the index in 2023:
Those seven companies are worth a combined $12 trillion and they account for 28.1% of the S&P 500 by value, so they have a huge influence over its direction. But the index also hosts companies from almost every other sector beyond technology, from consumer staples to energy.
Since 1957, the S&P 500 has delivered an average annual return of 10.26% -- assuming all dividends were reinvested -- which is enough to double an initial investment every seven years. Not a bad deal! Below are three popular ETFs that directly track the index's performance:
- SPDR S&P 500 ETF Trust (SPY +0.25%)
- iShares Core S&P 500 ETF (IVV +0.22%)
- Vanguard S&P 500 ETF (VOO +0.26%)
Each can be purchased as a single security through most reputable online brokerage platforms. Now, here's what it takes to maximize your chances of making money.
Image source: Getty Images.
Step 2: Hold on for at least 10 years
This step requires no action at all. Once an investor has decided which S&P 500 ETF to buy, they should let time do the rest. As I touched on at the top, the odds of making money in the stock market drastically improve the longer you remain invested.
Global investment manager Capital Group analyzed 94 years' worth of data to prove that case (note, while the S&P 500 was established in 1957, the S&P index was trading as early as 1926 when it included just 90 companies):
|
Holding Period |
Odds of a Positive Return |
|---|---|
|
1 year |
73% |
|
3 years |
84% |
|
5 years |
88% |
|
10 years |
94% |
Data source: Capital Group.
While the odds of making money are pretty good over a one-year period, short-term investing is never a good idea.
For starters, it's impossible to predict which years will join the 27% of losers. Any number of negative shocks could happen inside a 12-month period -- high inflation, rising interest rates, and geopolitical conflicts can unsettle the market. In fact, investors were dealt all three of those things in 2022 when the S&P 500 plunged 18%.
Time can smooth out all of that noise. To date, no crisis has lasted forever. Not even the COVID-19 pandemic could hold the market down in 2020, despite it being a once-in-a-century event.
With all of the above in mind, investors should definitely factor in a long-term time horizon the next time they enter the market.
