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The S&P 500 Demystified

The S&P 500 Demystified

January 18, 2024

Chances are you’ve heard financial experts, news reports, or even your neighbors talk about what’s happening in the stock market. But even when they’re discussing “the market,” they’re likely referring to something very specific: the S&P 500.

The Standard and Poor’s 500 Composite Stock Price Index, or S&P 500, is a common topic in financial conversations—and for good reason. It’s the go-to tool for tracking how well U.S. stocks are doing, and many investors rely on it to gauge the overall health of the stock market. Most people have flipped through the financial news and heard the term but still wonder how it applies to their portfolio. 

While you don’t need to grasp every intricate detail about the index, understanding the S&P 500 can make a significant difference to your financial planning journey. So, let’s take a look at exactly what the S&P 500 is, why it matters, and how it impacts your everyday investments.

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.

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.

A Long History

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 Is It So 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 the S&P 500 Is 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.

Can You 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. In fact, since its average annual return sits at about 10 percent, many investors consider it one of the most sought-after and successful indexes in the world.  

There are several ways to invest in the S&P 500 index. One way is to buy shares in each of the over 500 companies listed in the index, exactly as they are weighted. Of course, investing in all these companies individually is not for everyone, since it could get fairly costly and time-consuming. 

Another way to mimic the index is to invest in funds that track the S&P 500’s performance. Even if you’re uncertain how the S&P 500 might affect your portfolio, involving a trusted financial advisor can help you make the decision best suited for you.

Where to Find Help 

The fact is the S&P 500 can be a valuable tool for many investors. Whether you’re new to the investment world or you’re a seasoned investor, integrating the insights from the S&P 500 into your portfolio can guide you toward sound financial decisions and long-term success. 

But financial success is more than market tips and trends—it’s about taking a holistic, collaborative approach to meeting your unique goals. That’s where I can help. My goal is to work together to have an open and honest dialogue to understand your situation and create a plan that helps you pursue your goals effectively.

Email me at jim@glhcfinancial.com or give me a call at 916-967-3208 to see if I am the right fit to help you pursue your ideal financial future. 

About Jim

James Callens is a financial advisor at GLH&C Financial Services, a full-service, comprehensive wealth management firm. Jim has over 30 years of experience in the financial industry and uses his extensive resources and knowledge to help his clients experience simplicity and clarity in their financial lives. Jim spent more than 20 years working for GE Financial Advisors, both in its insurance services department and as a regional manager and financial advisor. He took part in GE’s Six Sigma Quality Training program and completed the National Association of Life Underwriter’s four-year LUTCF course. Jim also earned his certificate in financial planning from the University of California at Davis. In 2011, Jim combined his own firm, Callens Financial Group, with GLH Financial Services, creating GLH&C Financial Services, so he could provide even more value to his clients. 

Jim lives in Folsom, California, with his wife, Melissa, and his four children, Jacob, Kristen, Grant, and Andrew. Together, they enjoy outdoor activities like kayaking, bicycling, and vacationing at Lake Tahoe. To learn more about Jim, connect with him on LinkedIn.