Should You Invest in a Total Stock Index Fund or S&P 500 Index Fund? (2024)

FAQs

Should You Invest in a Total Stock Index Fund or S&P 500 Index Fund? ›

Total stock market index funds are only slightly more diversified than S&P 500 index funds. Since both types of indexes are heavily weighted toward large-cap stocks, the performance of the two funds is highly correlated (similar).

For investors with small-cap exposure elsewhere in their portfolios, the large- and mid-cap S&P 500 fund may suffice. But for a broader, one-stop-shopping fund, the total market index offers maximum diversification within the U.S. equity universe.

Some index funds provide exposure to thousands of securities in a single fund, which helps lower your overall risk through broad diversification. By investing in several index funds tracking different indexes you can built a portfolio that matches your desired asset allocation.

Who should invest in total market index funds? Total market index funds can be a great choice for both new and experienced investors. They're one of the easiest ways to gain broad stock market exposure at a low cost.

Investors, however, must consider the index fund that they select since not every one is low-cost, not some may be better at tracking an index than others. Moreover, owning an index does not mean you are immune from risk or losses if the markets take a downturn.

Legendary investor Warren Buffet once said that all it takes to make money as an investor is to 'consistently buy an S&P 500 low-cost index fund. ' And academic research tends to agree that the S&P 500 is a good investment in the long term, despite occasional drawdowns.

But the 5% rule can be broken if the investor is not aware of the fund's holdings. For example, a mutual fund investor can easily pass the 5% rule by investing in one of the best S&P 500 Index funds, because the total number of holdings is at least 500 stocks, each representing 1% or less of the fund's portfolio.

Experts agree that for most personal investors, a portfolio comprising 5 to 10 ETFs is perfect in terms of diversification. But the number of ETFs is not what you should be looking at. Rather, you should consider the number of different sources of risk you are getting with those ETFs.

As long as your index funds reflect that variety of investments, you should be properly diversified. In the end, learning how to invest is all about how much time you want to spend researching. If choosing one index fund is all you have time for, that's still better than not saving for retirement at all.

The rule stipulates investing 90% of one's investment capital towards low-cost stock-based index funds and the remainder 10% to short-term government bonds.

Which S&P 500 fund is best? ›

Created in 1992, Vanguard Total Stock Market Index Fund is designed to provide investors with exposure to the entire U.S. equity market, including small-, mid-, and large-cap growth and value stocks. The fund's key attributes are its low costs, broad diversification, and the potential for tax efficiency.

Total stock market index funds are an ideal choice to diversify a retirement portfolio, plus they're tax efficient, which also makes them a good fit for a taxable brokerage account. Forbes Advisor has analyzed dozens of options to arrive at what we believe are the best total stock market index funds available today.

ETFs can be traded more easily than index funds and traditional mutual funds, similar to how common stocks are traded on a stock exchange. In addition, investors can also buy ETFs in smaller sizes and with fewer hurdles than mutual funds.

The opening 9:30 a.m. to 10:30 a.m. Eastern time (ET) period is often one of the best hours of the day for day trading, offering the biggest moves in the shortest amount of time. A lot of professional day traders stop trading around 11:30 a.m. because that is when volatility and volume tend to taper off.

Invest Across Asset Classes

Investing only in the S&P 500 limits your portfolio to stocks, which can be a risky decision during major market crashes. Holding bonds, cash, real estate, and other assets can help to limit your risk during these periods.

The nominal return on investment of $100 is $24,831.97, or 24,831.97%. This means by 2023 you would have $24,931.97 in your pocket.

Fund description

The Invesco S&P 500® Downside Hedged ETF (Fund) is an actively managed exchange-traded fund (ETF) that seeks to achieve positive total returns in rising or falling markets that are not directly correlated to broad equity or fixed-income market returns.

When most people think about average market returns, those are the commonly cited numbers that they expect to achieve. At an 8% rate of return, $100,000 would turn into $1,000,000 after 30 years. If you have 30 years and $100,000, then there's a good chance that the S&P 500 can make you a millionaire retiree.

What is the 80 20 rule S&P 500? ›

80% of your portfolio's losses may be traced to 20% of your investments. 80% of your trading profits in the US market might be coming from 20% of positions (aka amount of assets owned). 80% of the US stock market capitalisation comes from around 20% of the S&P 500 Index.

Ideally, you should stay invested in equity index funds for the long run, i.e., at least 7 years. That is because investing in any equity instrument for the short-term is fraught with risks. And as we saw, the chances of getting positive returns improve when you give time to your investments.

How the 4% Rule Works. The 4% rule is easy to follow. In the first year of retirement, you can withdraw up to 4% of your portfolio's value. If you have $1 million saved for retirement, for example, you could spend $40,000 in the first year of retirement following the 4% rule.

While starting to invest when you're younger does give you the advantage of time, it's never too late to start investing.

Index funds give investors access to near-market returns with no stock picking or market timing required. But are market-level returns enough to grow your retirement account to seven figures? That's the million-dollar question. The easy answer is -- yes -- you can retire a millionaire with index funds.

While indexes may be low cost and diversified, they prevent seizing opportunities elsewhere. Moreover, indexes do not provide protection from market corrections and crashes when an investor has a lot of exposure to stock index funds.

Investing in lump sums are normally for those who may have a high-risk appetite but are keen on earning a greater reward. You should only invest with a lump sum if you are comfortable with the amount of risk involved in your investment.

You only need one S&P 500 ETF

You could be tempted to buy all three ETFs, but just one will do the trick. You won't get any additional diversification benefits (meaning the mix of various assets) because all three funds track the same 500 companies.

In investing, the 80-20 rule generally holds that 20% of the holdings in a portfolio are responsible for 80% of the portfolio's growth. On the flip side, 20% of a portfolio's holdings could be responsible for 80% of its losses.

You can invest in an S&P index fund through several different investment firms. The only real difference between them is the expense ratios (aka fees). Higher fees mean less of a return for you. It's also worth noting that an S&P 500 index fund is fairly diversified.

Do index funds return 10%? ›

While the index is not immune to overall market downturns, long-term investors have historically earned a nearly 10% average annual return. However, as with all investments, it's important to note that past performance can't be used to predict future results.

It's never a good idea to place all your savings in any single investment, even one with as much appeal as an S&P 500 index fund.

Because the S&P 500 index is used as a benchmark and is difficult for many active funds to beat, many investors will pick S&P 500 index funds to match the market's long-term average return, which is called passive investing.

Despite being one of the safer types of investments, S&P 500 index funds can help you make a lot of money over time. Historically, the S&P 500 has earned an average rate of return of around 10% per year. In other words, the annual highs and lows average out to around 10% per year over the long run.

Exchange-traded funds (ETFs) are a good way for investors to gain exposure to these three categories. The best U.S. stock ETFs for Roth IRAs are funds in a seven-way tie: IVV, VOO, SPLG, SPTM, ITOT, VTI, and BKLC. The best bond ETF for Roth IRAs is BKAG. The best global investing ETF for Roth IRAs is SPDW.

(“BlackRock”); State Street Global Advisors, a division of State Street Corporation (“SSGA”); and the Vanguard Group (“Vanguard”)—collectively known as the “Big Three,” own an increasingly large proportion of American public companies.

A total stock market index fund is an investment vehicle that contains a basket of stocks within a mutual fund or exchange traded fund (ETF) that tracks an equity index. An equity index contains numerous stocks across various industries designed to represent the performance of the overall equity market.

How do I choose a good index fund? ›

If you are looking at index investing, it's better to go with a broader index than select a few stocks in any segment. Therefore, avoid indices like Small Cap 50 and Mid Cap 50. If you compare the small-cap index with the mid-cap index, you will realise why the small-cap should be tactical.

Index mutual funds & ETFs

Index funds—whether mutual funds or ETFs (exchange-traded funds)—are naturally tax-efficient for a couple of reasons: Because index funds simply replicate the holdings of an index, they don't trade in and out of securities as often as an active fund would.

ETFs are more tax-efficient than index funds by nature, thanks to the way they're structured. When you sell an ETF, you're typically selling it to another investor who's buying it, and the cash is coming directly from them. Capital gains taxes on that sale are yours and yours alone to pay.

Is Investing in the S&P 500 Less Risky Than Buying a Single Stock? Generally, yes. The S&P 500 is considered well-diversified by sector, which means it includes stocks in all major areas, including technology and consumer discretionary—meaning declines in some sectors may be offset by gains in other sectors.

1. Vanguard S&P 500 ETF (VOO 0.04%) Legendary investor Warren Buffett has said that the best investment the average American can make is a low-cost S&P 500 index fund like the Vanguard S&P 500 ETF.

"Around September or October, the investor can buy the major market index ETFs: SPDR Dow Jones industrial average ETF (ticker: DIA), SPDR S&P 500 (SPY), PowerShares QQQ (QQQ) and iShares Russell 2000 (IWM). And then sell them around the April to May time frame, especially after a nice run-up," Hirsch says.

In Case of Emergencies

Thus, you can redeem your fund units at any time. In case of emergencies, you need not worry about timing your exit. You can simply exit the investments to meet your emergency needs. However, some funds may take up to two working days to transfer the amount to your bank account.

The Bottom Line. While both the DJIA and S&P 500 are used by investors to determine the general trend of the U.S. stock market, the S&P 500 is more encompassing, as it is based on a larger sample of total U.S. stocks. Investopedia requires writers to use primary sources to support their work.

The main drawback to the S&P 500 is that the index gives higher weights to companies with more market capitalization. The stock prices for Apple and Microsoft have a much greater influence on the index than a company with a lower market cap.

Should I keep my money in the S&P 500? ›

Regardless of where you invest, it's wise to keep a long-term outlook. The market could be shaky over the coming months or even years. But if you invest in an S&P 500 ETF and hold that investment for at least a couple of decades, you're almost guaranteed to make money.

Over the long run, the S&P 500 has returned about 10% annually to investors on average vs. just 3% or 4% for real estate.

As time goes on, the number increasingly drops, and according to the data, only about 10% of actively managed funds have outperformed the S&P 500 over the past 15 years.

Over rolling monthly 10-year periods through 2021, the fund has frequently outpaced the S&P 500 and its peer average.

Is Investing in the S&P 500 Less Risky Than Buying a Single Stock? Generally, yes. The S&P 500 is considered well-diversified by sector, which means it includes stocks in all major areas, including technology and consumer discretionary—meaning declines in some sectors may be offset by gains in other sectors.

All that said, the S&P 500 has been the smartest investment one can make over the past 65 years, so it really is never a bad time to invest in the S&P 500. While we could still see it decline this year, the gains, as they have done historically, should more than outweigh the losses.

History shows us that investing in an S&P 500 index fund -- a fund that tracks the S&P 500's performance as closely as possible -- is remarkably safe, regardless of timing. The S&P 500 has never produced a loss over a 20-year holding period.

Investing in equities, such as the S&P 500 index, should also be seen as a long-term investment of at least five years, to smooth out cycles within the stock market.

When most people think about average market returns, those are the commonly cited numbers that they expect to achieve. At an 8% rate of return, $100,000 would turn into $1,000,000 after 30 years. If you have 30 years and $100,000, then there's a good chance that the S&P 500 can make you a millionaire retiree.

Most experts agree that index funds are very good investments for long-term investors. They are low-cost options for obtaining a well-diversified portfolio that passively tracks an index.

Is it better to save money or invest in real estate? ›

“Real estate assets are typically the best inflation hedge available,” he said. “Real estate will grow in value with inflation, cash in the bank will not. … Its buying power will actually be eaten away by inflation.”

If you're looking for a long-term investment, real estate may be the better option. There are no guarantees, but real estate tends to appreciate in value over time. If you're looking for a more passive investment, stocks may be the way to go.