The S&P 500: What is it and why you should understand it?

Have you heard people talking about the stock market but just get confused trying to understand? While there are a lot of things to understand, there is one benchmark that is more important than others. One of the most important parts of the stock market is something called the S&P 500. This is like a super team of 500 big companies in the United States, including names you might know like Apple, Netflix, Google and Disney.

Over the last 30 years, the S&P 500 has had its ups and downs, but overall, it's been like a roller coaster that mostly goes up (hopefully this trend continues). Let's explore how it has grown, including something called dividends, and see some real examples of how money can grow over time.

What is the S&P 500?

Imagine you have a big basket, and in that basket, you put 500 of the most successful and large companies in America. That's what the S&P 500 is like. It's a collection, or an index, that gives us a good idea of how the whole stock market is doing.

Growth Over the Last 30 Years

The last 30 years have been quite a journey for the S&P 500. It has seen big climbs and some falls too, like in the late 2000s during the financial crisis. But if we look at the average rate of return each year, it's about 10-11%, including dividends.

What are Dividends?

Dividends are like little “thank-you” notes in cash that companies give to their shareholders. Not all companies pay dividends, but many in the S&P 500 do. These dividends are a part of what makes investing in stocks rewarding. Dividends are a reallocation of capital from the companies pocket to yours. It isn’t necessarily free money though. When a dividend is paid, the stock price is decreased equal to the value of the dividend.

How Money Grows in the S&P 500

Let's do some math to see how investing in the S&P 500 could have grown your money. Imagine if 30 years ago, you invested $10,000 in a fund that tracks the S&P 500. If we use the average yearly return of about 10%, here's a simple way to see how much your investment would have grown:

The formula we'll use is: Future Value = Present Value × (1 + Rate of Return)^Number of Years. So, in your case: Future Value = $10,000 × (1 + 0.10)^30
Doing this calculation, you'd end up with about $170,449 after 30 years! That's a lot more than the $10,000 you started with. That is a 17x return with ZERO dollars in additional investments. To see how this could have easily grown to over a million dollars, use our compound interest calculator and add additional monthly investments.

Why It Matters

You might be wondering why all this matters to you. Understanding how investments like the S&P 500 work is important for a few reasons:

Long-Term Growth: It shows that investing for the long term, even through ups and downs, can really pay off.

Power of Compounding: Just like with compound interest in a savings account, investing in the stock market can grow your money over time, thanks to the power of compounding.

Planning for the Future: Knowing about things like the S&P 500 can help you make smarter decisions when you start earning and saving money.

In the last 30 years, the S&P 500 has shown that it can be a powerful way to grow money over time. Investing in the stock market always comes with risks, and it's important to think long-term. By understanding how the S&P 500 works and the power of dividends and compounding, you can start to understand how people plan for their financial futures and grow their savings.

Here is a video from The Money Guy Show which helps break it down a little further.