How to Invest in the S&P 500 Index Funds
While there can be almost any number of indexes, the most famous ones are those based on the Dow Jones Industrial Average, the Standard & Poor’s 500 and the Nasdaq 100.
Of these, the S&P 500 Index has come to be seen as the bellwether for the American stock market. It contains the 500 largest companies in the United States, and when investors talk about “beating the market,” the S&P 500 is considered the standard.
In contrast, the Dow Industrials contains just 30 companies, while the Nasdaq 100 contains only 100 companies. While the holdings of these indexes do overlap somewhat, the S&P 500 contains the widest variety of companies across industries and is broadly diversified.
If you want to invest in the S&P 500, you don’t have to buy every single stock individually. Instead, you can invest in all the stocks in the index with one purchase via a mutual fund or exchange-traded funds (ETFs). Before 1975, if you wanted to buy the 500 stocks in the S&P 500, you would have had to buy each stock individually. Vanguard founder John Bogle introduced the first-ever index fund in that pivotal year, which tracked the S&P 500. These days, there are many S&P 500 index funds to choose from.
1. Find your S&P 500 index fund
It’s actually easy to find an S&P 500 index fund
Part of the beauty of investing in index funds is that an index fund will have exactly the same stocks and weightings as another fund based on the same index. In that sense, it would be like walking into five McDonald’s restaurants serving exactly the same food: which one would you choose? You’d probably select the restaurant with the lowest price, and it’s the same with index funds.
To determine whether a fund is cheap, you’ll want to look at its expense ratio. That’s the cost that the fund manager will charge you over the course of the year to own the fund.
If you’re investing in mutual funds, you’ll also want to see if the fund manager charges you a sales load. You’ll want to avoid this kind of expense entirely. ETFs don’t charge a sales load.
S&P 500 index funds have some of the lowest expense ratios on the market. Index investing is already cheaper than almost any other kind of investing, even if you don’t select the cheapest fund. Many S&P 500 index funds charge less than 0.10 percent annually. In other words, at that rate you’ll pay $10 annually for every $10,000 you have invested in the fund.
And again, since these funds are largely the same, your choice is not a “make or break” decision – you can expect to get the performance of the index, whatever that is.
2. Open your brokerage account
After you’ve selected your index fund, you’ll want to open a brokerage account. That gives you the ability to purchase mutual funds and ETFs, and you’ll even be able to buy stocks and bonds later, if you choose to do so.
You can typically open a brokerage account in 15 minutes or less, and you’ll want one that matches the kind of investments you’re going to make. If you’re going with a mutual fund, then try to find a broker that allows you to trade your mutual fund without a transaction fee. If you’re buying an ETF index fund, look for a broker that offers it without a commission.
The best brokers offer hundreds of ETFs and thousands of mutual funds without a trading fee.
A good broker will lower your expenses even further, and it’s quick to set up an account.
3. Determine how much you can afford to invest
You don’t have to be wealthy to begin investing, but you do have to have a plan. And that plan begins with figuring out how much you’re able to invest. The best approach is to figure out how much you can put into the market monthly. You’ll want to add money regularly to the account, and should plan to hold it there for at least three-to-five years to allow the market enough time to climb and ride out any downturns.
The less you’re able to invest, the more important it is to find a broker that offers you low costs, because that’s money that could otherwise go into your investments.
Once you’ve figured out how much you can invest, move that money to your brokerage account. Then set up your account to regularly move a desired amount each month from your bank account.
4. Buy the index fund
Once you know the S&P index fund you want to buy and how much you’re able to invest, go to your broker’s website and set up the trade.
Stick to the broker’s easy trade entry form, which often appears right at the bottom of the screen. Input the fund’s ticker symbol and how many shares you’d like to buy, based on how much money you’ve put into the account.
If you’re able to move money into the brokerage account regularly, many brokers allow you to set up a trading schedule to buy an index fund on a recurring basis. This is a great option for those investors who don’t want to remember to place a trade each month. You can set it up and forget about it.