Investing in the S&P 500 through Index Funds and ETFs in 2025: A Guide to Financial Involvement
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The S&P 500 is a popular index that represents approximately 80% of the total U.S. stock market's value, consisting of about 500 large public U.S. companies. Here's a guide to help you understand the best strategies for investing in an S&P 500 index fund or ETF.
Choose low-cost S&P 500 index funds or ETFs
These funds track the S&P 500 index and typically have lower fees than actively managed funds, helping you keep more of your returns. Examples include mutual funds or ETFs that replicate the S&P 500 performance closely.
Employ dollar-cost averaging
Regularly invest a fixed amount of money over time, regardless of market conditions. This strategy reduces the risk of investing a large sum at a market peak and smooths out purchase prices over time.
Build a diversified portfolio
While the S&P 500 covers about 80% of the U.S. market by capitalization, it consists mainly of large-cap U.S. stocks. To reduce volatility and risk, diversify your investments by including bond index funds and ETFs focused on small- and mid-cap stocks or international markets.
Hold for the long term
S&P 500 funds are designed for long-term growth and generally experience less volatility than individual stocks. Avoid frequent trading and stay invested through market ups and downs to maximize compounding.
Avoid stock picking
Experts recommend owning broad market index funds rather than trying to pick individual winners, which is difficult and often underperforms the market.
Alternative options include direct indexing, where you own all individual stocks in the S&P 500 weighted by market cap, which allows more customization but requires higher effort and management fees.
Caveats: The S&P 500 index is limited to large-cap U.S. companies, so it does not provide full market diversification alone. Also, growing passive investments in the S&P 500 can cause concentration risk in the largest stocks, potentially increasing volatility during downturns.
Investing in the S&P 500
To invest in an S&P 500 index fund or ETF, you need to open a brokerage account first. Stock costs vary significantly within the S&P 500 index. Some stocks cost under $100, while others cost $500 a share or more. Some brokers offer fractional shares, allowing you to invest any dollar amount.
Brokerage Account Options
Two popular brokerage options include Charles Schwab and Coinbase. Charles Schwab offers $0 per online equity trade, but currently, no promotion is available. As of now, Coinbase has a NerdWallet rating of 4.6/5, and new users can earn up to $200 in cryptocurrency when they sign up. Coinbase fees vary by type of transaction; other fees may apply.
Account Minimums
Both Charles Schwab and Coinbase do not have account minimums, making them accessible to investors of all levels. Additionally, there's a promotion offering up to $10,000 when you transfer your investment portfolio to Public for Coinbase users.
Investing Strategy
The best approach is to invest consistently in a low-cost S&P 500 index fund or ETF as the core of a diversified, long-term portfolio, using dollar-cost averaging and complementing it with other asset classes for balanced risk and growth potential. Regular contributions over time can be a stronger long-term strategy compared to making a lump-sum investment.
- To help manage your personal finances, consider following advice on investing in an S&P 500 index fund or ETF.
- It's wise to choose low-cost S&P 500 index funds or ETFs that closely track the S&P 500 index and typically have lower fees than actively managed funds.
- Diversify your investments by including bond index funds, ETFs focused on small- and mid-cap stocks, or international markets in addition to S&P 500 funds.
- If you're thinking of investing in an S&P 500 index fund or ETF, you'll first need to open a brokerage account.
- Consider alternatives to broad market index funds, such as direct indexing, which allows for more customization but requires higher effort and management fees.
- For beginners in personal-finance and investing, look into using a personal finance app, such as Coinbase or Charles Schwab, to invest in an S&P 500 index fund or ETF, with no account minimums available, and regular contributions made easier through a strategy like dollar-cost averaging.
