5 Reasons to Ditch Other Stock Investments for the S&P 500

by David Ning on 16 December 2011 1 comment

Getting someone to invest in a low cost S&P 500 index fund is tough, as owning just that one fund seems almost too simple. Doing so certainly offers no excitement. Yet, most people will be much better off in the long run by owning the S&P 500 index fund instead of buying a bunch of mutual funds. Here are five reasons why. (See also: How (and Why) to Start an Investment Club)

The S&P 500 Is Less Risky Than What Most People Buy

One of the best (and seldom talked about) advantages of owning the S&P 500 index is that you are betting on the economy rather than on the performance of a certain group of companies. This means that unless you believe the world is going to collapse and never come back, you are better able to sleep at night when stocks take a hit. With a higher level of certainty that valuations may rise in the future, more people will find it easier to buy more when things look bleak, and this alone can accelerate the growth of your holding very quickly.

Re-balancing Is More Trivial With Just One Fund

Not many people who own a bunch of individual stocks or a slew of mutual funds re-balance regularly, because doing so is cumbersome. When there is only one stock fund to change, everything becomes much simpler and easier to manage.

Many Reports Show the S&P 500 Index Performance Without Dividends

Most funds try to compare themselves to the S&P 500, but many of them cite the performance of the index itself instead of the performance of the index plus the dividend that the 500 companies in the S&P 500 distribute. The current yield on the S&P 500 is around 2%, which means that your fund (or your own stocks) better be outperforming it by more than 2% for it to be worth your while.

Investing in the S&P 500 Likely Triggers Fewer Taxes

If you hold the index fund for more than a year, the current tax rate is only 15% because it's considered a long-term holding. When you buy and sell individual stocks, some transactions will naturally fall inside the one year window, triggering higher taxes. And when you own a fund, the same thing happens because you really don't have a choice as to when the fund will buy or sell.

Fewer Fees

It's not just the expense ratio either, which is approximately 1% when you compare a typical index fund versus a typical mutual fund. Unless you are buying them inside your 401(k), most brokerages will charge you commissions whenever you buy and sell, so you pay more the more funds you own. When you don't invest in the S&P 500 index fund, another cost you incur is the time you spend researching different options. You may even subscribe to different newsletters, services, newspapers, or magazines too. All of these are costs that not many people factor in.

Buying just the S&P 500 is boring, and you certainly don't have much to brag about when you are just getting the market returns every year. Sure, buying mutual funds may mean that you outperform the market by a wild margin for certain periods of time, but stretch that out long term and very few will benefit from avoiding the S&P 500 in their portfolio. And with all the extra time you gain, the ability to easily buy more when prices are depressed, and the likelihood of beating the returns of most of the public, investing in the S&P 500 is probably the most prosperous decision you can make for yourself long term, helping you retire comfortably. And by then, you will have lots to brag about.

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Demitri

Nice article! I would just add that you can find plenty whole-market index funds with fees less than 1%, as compared to most mutual funds with fees in the 2-3% range. I like Vanguard Total Market Fund, as a good example.