There are a number of reasons why the S&P500 is perfect for inexperienced investors. Here are 3:
The S&P500 includes 500 companies which means that it is highly diversified. It includes a wide range of companies that operate in a host of different sectors.
This is good because your investment will be somewhat protected with hedging. This means that when one sector declines, other sectors will increase to make up (or soften) that decline.
According to Lawrence Fisher and James H. Lorie, who released “Some Studies of Variability of Returns on Investments In Common Stocks” in 1970, it is necessary to hold at least 30 stocks to be fully diversified.
As you can see, the S&P500 delivers an incredible amount of diversification.
One aspect of investment that often surprises people is that it is actually better to invest in funds that do not have a manager.
There is an abundance of research that has found this to be true.
For example, research by Elton, Gruber & Souza, appropriately named “Are Passive Funds Really Superior Investments? An Investor Perspective”, notes that investors can outperform actively managed funds by investing in passively managed, benchmark funds (like the S&P500).
There are a number of reason why this is the case, the main reasons though are that actively managed funds typically have high fees and that investment managers typically make a number of human errors that affect investment returns.
Simply put, a key advantage of the S&P500 is that it is typically very cheap to invest in. Most S&P500 funds offered by financial institutions are priced at a low price. For example, you might be able to find a fund that allows you to invest as little as £5 into the fund.
The transaction fees are also low and are typically set at around £1.50 in the UK. So, the benefit is that ordinary people can regularly invest small amounts without being beaten down by transaction fees.
This is attractive when you compare it to the alternative of investing in single stocks. If you were to invest into Amazon today, it would cost you around $3300 for one stock, plus $30 for the transaction.
Therefore, an investment in Amazon would cost you $3330 minimum. In contrast, you would easily be able to invest $50 a month into the S&P500 and it would cost you around $51.50.
There is some variation from one provider to the other, but the general point is that the S&P500 is very low cost.