What is the S&P 500 and why everyone keeps talking about it

A simple breakdown of the S&P500 and why this easy investment strategy is probably one of the smartest

If you have spent any time around investing content you have probably heard the S&P 500 mentioned everywhere. It sounds important and intimidating but it is actually easy to understand, and it can also be one of the simplest investing ideas out there. 

Let’s break it down in simple terms.

What is the S&P500 ?

Think of the S&P 500 as the VIP guest list of the 500 biggest companies in the United States. It is like the Met Gala of the stock market: only the best of the best get an invite.

Well known companies you heard of across many industries are part of the S&P 500, like Airbnb, Coca Cola, FedEx, Tesla, and everything in between.

And like any real VIP and not everyone gets invited every year.

Companies are not locked in forever. If a business shrinks, loses relevance or no longer meets the criteria it (aka it “flops”) it can be removed and replaced by a stronger one. The list evolves as the market evolves.

That is part of the magic: by investing in the S&P500 you are not stuck owning yesterday’s winners, you are sticking with what is relevant today.

How the S&P 500 works

You cannot buy the S&P 500 directly. Instead you buy an ETF (an “exchange traded fund”) which is a fund designed to track the index.

An ETF lets you invest in all those companies at once with a single purchase that gives you instant diversification since you own a piece of 500 companies. In other words, instead of trying to guess which company will win you own a piece of all of them and let the market do its thing.

Less stress & more balance is very Hot Money Mom energy.

What kind of returns does the S&P 500 really have ?

This is the part people care about most and also the part that causes the most panic: the honest answer is “it depends”.

Some years are great, some years are red and some years feel like the market woke up and chose violence (Millennials will remember 2008 *shivers*).

But here’s the thing: when you zoom out and look at decades, not months or days, the S&P 500 has historically averaged around 10 to 11% per year over the long term. That includes crashes, recessions, bubbles, and every scary headline in between (like when toilet paper was selling out at the onset of Covid).

This is why long-term investors focus less on what happens this year and more on staying invested. Time does the work for you, and the easiest thing to do is to keep adding to it and letting it sit.

Don’t trust me and my pink website ? Fine, then listen to the GOAT himself: Warren Buffet.

He has famously said that most investors would be better off owning a simple S&P500 index fund rather than trying to beat the market. In fact, by doing this you will most likely be beating the top paid financial experts on Wall Street who do this for a living.

Yes, it really can be that simple.

Why investment strategy works

The S&P 500 is not flashy and it’s not complicated.

And that is exactly why it works; think of it like your favourite black dress that’s your go-to for outings. It’s pretty basic, but fits well, it feels right, and it makes you feel confident. Now translate that feeling into you investment portfolio. 

Instead of chasing hot stocks or trying to time the market you focus on consistency. You invest regularly, and stay invested even when the market is down, and let compounding do its thing while you live your life.

When Warren Buffet, most likely the greatest investor of all time, tells you to keep it boring it might be worth listening.

How Canadians can invest in the S&P 500

You can buy ETFs that track the S&P 500 in Canadian dollars or in US dollars through most brokerage accounts. These ETFs hold the underlying US companies but are packaged in a way that is accessible to Canadian investors.

You can also hold these investments inside registered accounts like a TFSA or RRSP depending on your broader strategy and tax situation.

The key takeaway is that you do not need a complex setup or insider knowledge to get started.

Now for the disclaimer

The S&P500 is not risk free: markets do not go up in straight line, they go up, then down, then up again, sometimes very suddenly. It can feel messy and dramatic in the short term. That said, even if past preformance is no garantee for future performance, historically the market has always trended upward over time. Zooming out matters.

It is not a get rich quick strategy: you will not double your money overnight.

And it is not the only way to invest: it’s just a no brainer, hands off way to get into long-term investing because it is simple diversified and designed to evolve with the economy.

Lastly, because of the volatility, this should be used for long-term investing and not with money you need in the near future (for example, it should not be used for money you plan on using in 5 years or less).

One last thing before you go

The S&P 500 focuses on US companies, but for many investors Canadian and/or global exposure makes more sense, and that is totally valid. Your investments should align with your comfort level, so if that is you, you aren’t out of options (far from it). 

There are many other alternatives that let you invest in Canadian companies and global markets instead while still following a long term diversified approach.

That is exactly what we will cover an upcoming article.

For now remember this: you do not need to be an expert to invest well. You just need a strategy that aligns with your values and that you can stick with long term, and buying into a fund that tracks the S&P500 is only one of very many investment strategies.