Want to Invest in the S&P 500 Index? Understand Three Investment Strategies Suitable for Ordinary People in One Article

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Investing in one of the world’s most important indices, the S&P 500, may sound complicated, but it’s actually much simpler than you might think. You have every opportunity to participate and share in the growth dividends of the US market.

Over the past 30 years, its average annualized return has reached 9%, which fully demonstrates its strong long-term growth potential.

This article will clear away the fog for you, help you find the optimal path to investing in the S&P 500 Index, and allow you to easily get involved.

Key Takeaways

• Regular investing and long-term holding are the key strategies for investing in the S&P 500 Index.
• Dividend reinvestment can help your capital achieve compound growth.
• ETFs are suitable for investors who prefer flexible trading, while index funds are ideal for long-term automatic dollar-cost averaging.
• Ordinary investors should avoid high-risk investment methods such as futures and contracts for difference (CFDs).
• The barrier to investing in the S&P 500 Index is very low; you can start with a small amount of money.

Core Concepts Before Investing

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Before you start investing, you need to grasp a few core concepts first. These concepts are the cornerstone of successful investing, helping you stay calm amid market fluctuations and ultimately achieve your financial goals.

Strategy Core: Dollar-Cost Averaging and Buy-and-Hold

One major challenge in investing is “market timing,” which involves trying to buy at market lows and sell at highs. However, predicting the market is extremely difficult. Therefore, a simpler and more effective approach is dollar-cost averaging.

Dollar-cost averaging, also known as “cost averaging,” means you invest a fixed amount regularly regardless of whether the market is rising or falling. This method can help you eliminate emotional decision-making, avoiding panic selling during market downturns or chasing highs during market euphoria.

• When the market falls: Your fixed investment can buy more shares.
• When the market rises: Your fixed investment buys fewer shares, but the assets you already hold are appreciating.

Although research shows that, based on historical data, lump-sum investing (investing all at once) yields higher returns in two-thirds of cases, dollar-cost averaging provides psychological security and helps you develop the good habit of consistent investing.

The Magic of Compounding: Why Reinvest Dividends

Many companies in the S&P 500 Index regularly pay dividends to shareholders. You can choose to take the cash or automatically reinvest it to buy more index shares. The latter is the key to unlocking the magic of compounding.

Dividend reinvestment means your returns can generate new returns for you. The following example clearly demonstrates its power:

Through dividend reinvestment, your asset growth accelerates significantly, and the difference becomes substantial over the long term.

Why Hold the S&P 500 Index Long-Term?

Short-term market fluctuations are unpredictable, but historical data shows that holding high-quality assets long-term is an effective way to achieve positive returns. For the S&P 500 Index, time is your best friend.

Data shows that from 1926 to 2023, the probability of positive returns from holding the S&P 500 for any single year is 75%. However, if the holding period is extended to 10 years, this probability jumps to 95%.

Even in the face of historic market crashes, the market has ultimately demonstrated strong resilience.

For example, the crashes triggered by the 2008 global financial crisis and the 2020 COVID-19 pandemic, the market recovered and reached new highs within a few years or even months. Therefore, sticking to long-term holding and ignoring short-term noise is the key to successful S&P 500 Index investing.

Method One: Investing in S&P 500 ETFs

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If you want a way to invest that’s as simple as buying and selling stocks, then ETFs are undoubtedly your top choice. This is currently one of the most popular and direct investment methods.

What is an ETF?

ETF stands for “Exchange-Traded Fund”. You can think of it as a “basket” that packages various assets, and this basket itself can be bought and sold anytime on the stock exchange like a single stock.

Investing in an S&P 500 ETF means you instantly own shares in 500 top US companies, easily achieving diversification and avoiding the risk of individual stock blowups.

Its price fluctuates continuously during trading hours, providing you with great flexibility.

Advantages: Flexible Trading and Low Fees

The biggest attractions of ETFs are their two core advantages:

1. Extremely flexible trading: You can quickly buy or sell through a brokerage account at any time during US stock market hours. This flexibility allows you to react swiftly to market changes.
2. Extremely low management fees: Since ETFs passively track the index and don’t require frequent interventions by fund managers, their management costs are far lower than actively managed funds.

Most S&P 500 ETFs have annual expense ratios of around 0.03%, while many actively managed funds can have fees as high as 0.59% or more. Over the long term, this fee difference significantly impacts your final returns.

The three most mainstream S&P 500 ETFs on the market are SPY, IVV, and VOO. You can choose based on your preferences:

For long-term investors, the low fees of IVV and VOO are more attractive. For those who trade frequently, SPY’s ultra-high liquidity may be a better choice.

Disadvantages: Trading Commissions and Price Fluctuations

Despite their strengths, ETFs have some costs and characteristics to note:

• Trading costs: Although many US brokers now offer commission-free trading, you should still be aware of a hidden cost—the bid-ask spread. This is the small difference between the buy and sell prices. For highly liquid ETFs like SPY, the spread is very small, but it remains part of the trading cost.
• Real-time price fluctuations: ETF prices change constantly during the trading day. This is an advantage for investors looking to seize intraday opportunities, but it can be bothersome for those who don’t want to monitor real-time prices and prefer trading at the closing price.

Suitable For: Investors Who Prefer Flexible Operations

Overall, investing in S&P 500 ETFs is ideal for the following people:

• Those who want to buy and sell flexibly like trading stocks.
• Those who have a brokerage account and are comfortable operating it themselves.
• Those sensitive to trading costs and seeking low expense ratios.

You can easily fund your brokerage account through platforms like Biyapay and purchase these ETFs to start your index investing journey.

Method Two: Investing in S&P 500 Index Funds

If you don’t like monitoring the market daily and prefer a “set it and forget it” approach, then S&P 500 index funds are tailor-made for you.

What is an S&P 500 Index Fund?

An S&P 500 index fund is a type of mutual fund. Its sole goal is to track the performance of the S&P 500 Index. The fund manager buys shares in the 500 companies included in the index and replicates their weightings exactly.

This strategy is called “passive management.” It is the complete opposite of “active management.” Actively managed funds try to beat the market through stock picking, while index funds simply follow the market without making active decisions. This simple strategy also results in extremely low operating costs.

Advantages: Ideal for Dollar-Cost Averaging and Low Barrier to Entry

The greatest appeal of index funds is that they are perfectly suited for dollar-cost averaging strategies.

• Easy automatic investing: You can set up automatic investment plans (AIPs) through your broker. Simply set a fixed amount to invest monthly or weekly, and the system will automatically purchase fund shares for you. This helps build discipline and avoid emotional decisions.
• Extremely low investment threshold: Unlike buying ETFs where you consider share price, many index funds have very low minimum investments—some as low as $1. You can easily fund your brokerage account through platforms like Biyapay and start your dollar-cost averaging journey.

Disadvantages: Lower Liquidity

The main drawback of index funds is less flexible trading.

Unlike ETFs, they cannot be traded anytime during the day. Mutual funds are priced and traded only once per day after the market closes at the “net asset value (NAV).” This means that no matter when you place an order during the day, your buy or sell will execute after 4:00 PM ET at the next calculated price.

To help you better understand the differences between ETFs and index funds, refer to the table below:

Suitable For: Conservative Investors Who Prefer Long-Term Dollar-Cost Averaging

In summary, investing in S&P 500 index funds is especially suitable for:

• Those who want a hands-off approach and don’t care about short-term market fluctuations.
• Those who prefer disciplined long-term saving through automatic dollar-cost averaging.
• Those who don’t need immediate trading and can accept once-per-day trading.

Method Three: Other High-Threshold Approaches

In addition to ETFs and index funds, you may hear about more complex investment methods. These typically involve financial derivatives and, while they sound professional, they are not suitable for most ordinary investors.

Directly Buying Component Stocks

In theory, you could manually purchase all 500 stocks in the S&P 500 Index and allocate them according to their market-cap weightings. However, this approach is practically infeasible.

• Extremely high capital requirement: Buying even one share of each of the 500 companies requires substantial funds.
• Extremely cumbersome operations: You would need to continuously track changes in index components and weightings and manually rebalance, which consumes a huge amount of time and effort.

Futures and Contracts for Difference (CFDs)

Futures and CFDs are two common financial derivatives. They allow you to speculate on the future direction of the index without actually owning the underlying stocks.

S&P 500 futures are standardized legal agreements to buy or sell the index at a predetermined price on a future date. They are cash-settled contracts, meaning profits and losses are paid in cash without actual stock delivery.

The biggest feature of these tools is leverage. Leverage allows you to control large positions with less capital, amplifying both potential profits and potential losses.

Why Not Recommended for Ordinary People?

These high-threshold methods carry extremely high risks for ordinary investors, mainly for the following reasons:

1. High capital requirements: Trading futures requires posting margin. This is not a small amount—it’s essentially the “entry ticket.” For example, initial margin requirements for E-Mini S&P 500 futures can range from several thousand to tens of thousands of dollars.
2. Uncontrollable risks: Leverage is a double-edged sword. A small market move can wipe out your entire principal or even leave you in debt. This high-risk game is not suitable for ordinary people aiming for long-term growth.
3. Extremely complex operations: Derivative trading involves complicated contract rules, expiration dates, margin calls, and more, requiring professional knowledge and constant market monitoring.

Advice: For the vast majority of people, ETFs and index funds are the simplest and safest ways to invest in the S&P 500. Please stay away from these complex tools that get your heart racing.

Now that you understand the various ways to invest in the S&P 500 Index. ETFs are suitable for flexible trading, while index funds are perfect for hands-off dollar-cost averaging. You can use the table below to find the path that best suits you.

As John Bogle, the founder of index funds, said: “Don’t look for a needle in a haystack. Just buy the whole haystack!”

No matter which method you choose, the key to success is long-term persistence. Take the first step now!

FAQ

Which is better: ETFs or index funds?

There is no absolute “better.” It entirely depends on your investing habits. If you like flexible operations like trading stocks, ETFs are more suitable. If you prefer setting it up and letting it run automatically with minimal effort, index funds are the better choice.

How much money do I need to invest in the S&P 500?

The threshold for investing in the S&P 500 is very low. You can invest in ETFs through fractional shares or choose index funds with minimums as low as $1. You don’t need a lot of money to start your investment journey.

Can investing in the S&P 500 lose money?

In the short term, the market fluctuates, and your investment value may decline. But historically, long-term holding significantly reduces the risk of loss. As long as you persist in investing and ignore short-term noise, the likelihood of positive returns is very high.

How should I handle received dividends?

You can choose to take dividends as cash income or automatically reinvest them to buy more fund shares. To maximize the power of compounding, it is strongly recommended to choose dividend reinvestment, letting your returns generate even more returns for you.