The key to enjoying a comfortable retirement is to invest your money in solid, dependable growth stocks for the long term.
However, some investors may need help to nail down specific stocks to park their money in.
A fair amount of research and monitoring is involved when you allocate money to stocks, and some investors may have neither the time nor inclination to engage in such an activity.
Luckily, there is an alternative.
The widely-followed S&P 500 Index is a great proxy for growth stocks in the US, and you can invest it through an exchange-traded fund (ETF) such as SPDR S&P 500 ETF Trust (NYSEARCA: SPY).
But you may be wondering – exactly how safe is the S&P 500? Will investing in this index allow you to sleep well at night?
Composition of the S&P 500
The bellwether S&P 500 Index is one of the most popular gauges used by investors for large-cap US equities.
The index includes 500 companies and covers around 80% of available market capitalisation.
The S&P 500 Index was created back in 1957 and is a market-cap-weighted stock index, which means that stocks with higher market capitalisations enjoy a higher weightage within the index.
REITs are eligible for inclusion in the index but ETFs and American Depository Receipts (ADRs) are excluded.
As of 30 September 2024, there are 504 constituents with a median market capitalisation of US$38 billion.
The top 10 constituents are well-known names such as Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT), and Nvidia (NASDAQ: NVDA).
Also included in the top 10 are technology and consumer discretionary companies such as Meta Platforms (NASDAQ: META), Alphabet (NASDAQ: GOOGL), Amazon (NASDAQ: AMZN), and Tesla (NASDAQ: TSLA).
With technology companies having the highest market capitalisation in the trillion-dollar range, the S&P 500 Index naturally has technology as its largest sector component at 31.7%.
Next is Financials at 12.9% and then Healthcare at 11.6%.
Together, these three sectors make up more than half (56.2%) of the S&P 500 Index.
Historical performance and dividend yield
With the index made up of mega-cap, well-known names, it should ease the worries that any investor has.
The S&P 500 Index also boasts a consistently strong performance over the years.
The net total annualised return over the last decade stood at 12.76%, which is impressive considering fixed deposits are paying just 3% to 4% and the CPF Ordinary Account is yielding just 2.5%.
This annualised net total return also comfortably beats Singapore’s core inflation, which came in at 2.7% in August 2024.
Being a growth stock index, the S&P 500 Index does not have a high dividend yield, coming in at just 1.3% as of 30 September 2024.
Rebalancing benefits
An interesting aspect of the S&P 500 Index is that it is rebalanced every quarter.
This means that certain companies may be removed from the index while other companies are then added in.
This rebalancing ensures that the index is kept current with faster-growing companies that demonstrate healthy prospects.
In the process, the index may exclude businesses that have fallen by the wayside and are floundering.
By investing in the S&P 500 Index, you will always gain exposure to promising growth companies as the rebalancing will include the better, fast-growing companies.
As an example, the S&P 500 Index removed Etsy (NASDAQ: ETSY), American Airlines Group (NASDAQ: AAL), and Robert Half (NYSE: RHI) year-to-date, to name a few.
In their place, artificial intelligence player Palantir (NYSE: PLTR), technology firm Dell Technologies (NYSE: DELL), and cybersecurity specialist Crowdstrike (NASDAQ: CRWD) were added in.
This process of removing and inclusion helps to refresh the index and fill it with companies that display robust prospects while allowing slower-growing companies to leave the index.
Get Smart: A safe bet for the future
We have looked at the way the S&P 500 Index is constructed and explored its major constituents.
The top 10 stocks comprise household names such as Apple, Amazon, and Microsoft.
These companies should offer peace of mind to investors as they have a long operating history and a track record of good financial performance.
Looking at the index’s historical annualised return should also reassure investors that parking their money there will provide them with a solid long-term return.
Finally, the quarterly rebalancing of the index ensures that the best companies are included, thus providing you with exposure to the top 500 businesses in America.
The S&P 500 Index is thus a safe bet for the future and you can confidently allocate some of your money to invest in it for the long term.
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Disclosure: Royston Yang owns shares of Apple, Meta Platforms, and Alphabet.
