What Is The S&P 500 And Why Does It Matter? - Ramsey Everyday Millionaires

Summary

Podcast Title: Ramsey Everyday Millionaires
Episode: What Is The S&P 500 And Why Does It Matter?
Release Date: December 16, 2024
Host/Authors: Ramsey Network (including Dave Ramsey, Ken Coleman, Rachel Cruze, George Kamel, Jade Warshaw, and Dr. John Delony)

Introduction

In the December 16, 2024 episode of Ramsey Everyday Millionaires, the Ramsey Network delves into the intricacies of the S&P 500—a fundamental concept in investing that often confuses both novice and experienced investors. Hosted by members of the Ramsey Network, including Dave Ramsey (Speaker A) and George Kamel (Speaker B), the episode aims to demystify the S&P 500 and elucidate its significance in building and managing wealth.

Understanding the S&P 500

Speaker A kicks off the discussion with an engaging introduction to the S&P 500, emphasizing its role as a pivotal index in the financial markets. At [00:31], Speaker A states:

"Anything nerdier than the S&P 500 standard and poor baby. That is, if you know, you know."

He breaks down the term "S&P 500" by explaining that it is an index that measures the top 500 companies in the United States, overseen by Standard & Poor's, a prominent financial services company. This index serves as a benchmark for the overall performance of the U.S. stock market.

Index Funds vs. Mutual Funds

The conversation transitions to different types of investment vehicles, with Speaker A distinguishing between index funds and mutual funds. At [01:00], he elaborates:

"An index fund is a type of mutual fund that buys stock in these 500 companies."

Unlike mutual funds that are actively managed by investment professionals aiming to outperform the market, index funds are passively managed. This means they track the S&P 500, mirroring its performance without attempting to select individual stocks.

Speaker A further explains that the S&P 500 now represents about 80% of the total stock market value, highlighting its extensive coverage of large-cap companies. Investing in the S&P 500 index fund ensures that an investor's returns will generally align with the performance of these 500 companies.

Historical Performance and Returns

One of the key insights discussed is the historical average annual return of the S&P 500. At [01:30], Speaker A shares:

"The average annual return, when you look at the history of this thing, has been around 10 to 12% since its inception."

This statistic underscores the S&P 500's reliability as a long-term investment vehicle, offering substantial returns over decades despite yearly market fluctuations.

Pros and Cons of Investing in the S&P 500

The hosts delve into the advantages and disadvantages of investing in the S&P 500 index funds:

Pros:

Diversification:
"You're diversified across investments," Speaker A notes at [02:15]. Investing in the S&P 500 inherently spreads risk across 500 different companies and 11 major industries, reducing the dependency on any single investment.
Reduced Risk:
By holding a wide array of stocks, investors mitigate the risk associated with poor performance of individual companies.
Predictability:
The performance of the S&P 500 is closely aligned with the overall market trends, making it a relatively predictable investment compared to selecting individual stocks.

Cons:

Average Returns:
At [02:45], Speaker A points out, "You're settling for the average returns." While the S&P 500 offers steady growth, investors may miss out on higher returns that could be achieved through active management and selective stock picking.
Limited Upside Potential:
Passive investing tracks the market but doesn't capitalize on outperforming stocks, which active managers aim to identify and invest in.

Active Management vs. Passive Investing

Expanding on the comparison, Speaker A explains that actively managed mutual funds seek to beat the S&P 500 by selecting specific companies believed to perform better than the index. This requires professional expertise and can lead to higher returns, albeit with increased risk and typically higher fees.

In contrast, passive investing through index funds like the S&P 500 offers a cost-effective and straightforward approach to market participation without the need for continuous management or high fees.

Resources and Further Learning

The episode concludes with an invitation for listeners to further their financial education. At [02:57], Speaker A encourages:

"If you're ready to invest or excited, we've got a whole hub that's totally free for you ramsaysolutions.com invest and we have a complete guide to investing that's totally free."

This resource provides an in-depth guide to investing, tailored to the needs of everyday millionaires aiming to build and manage their wealth effectively.

Notable Quotes

Speaker A ([00:33]): "Anything nerdier than the S&P 500 standard and poor baby."
Speaker A ([01:00]): "An index fund is a type of mutual fund that buys stock in these 500 companies."
Speaker A ([01:30]): "The average annual return... has been around 10 to 12% since its inception."
Speaker A ([02:15]): "You're diversified across investments."
Speaker A ([02:45]): "You're settling for the average returns."

Conclusion

The "What Is The S&P 500 And Why Does It Matter?" episode of Ramsey Everyday Millionaires offers a comprehensive overview of one of the most vital components of modern investing. By breaking down complex financial concepts into understandable segments, the Ramsey Network equips listeners with the knowledge to make informed investment decisions. Whether you're a seasoned investor or just starting, understanding the S&P 500 is crucial for building a robust and diversified investment portfolio.

For those looking to dive deeper, the Ramsey Network provides additional resources and professional guidance through SmartVestor Pro via ramsaysolutions.com/invest.

Connect with Ramsey Everyday Millionaires:

Website: ramsaysolutions.com/invest
SmartVestor Pro: Access professional investment advice and resources.

Transcript

A (0:05)

This episode is sponsored by SmartVestor. Connect with an investing pro for free at Ramsaysolutions.com invest. You're listening to Ramsey Everyday Millionaires where we talk investing, retirement, building wealth, and outrageous generosity.

B (0:22)

All right, speaking of traditions, George, you know I like when you talk nerdy.

A (0:27)

You do like when I talk nerdy to you? And today's what are you gonna talk?

B (0:31)

I'm told you're gonna talk nerdy to me.

A (0:33)

What is the topic? Anything nerdier than the S&P 500 standard and poor baby. That is, if you know, you know.

B (0:41)

Yeah.

A (0:41)

Well said. So we hear about this term all the time in the news. The S&P 500, a lot of people's eyes glaze over. So I'm gonna give you the talk Nerdy to me. Kind of put the cookies on the floor for everyone listening. Because we do talk about it a lot. And it's important not to floor.

B (0:57)

Maybe the bottom shelf.

A (0:58)

Bottom shelf.

B (0:58)

Nobody wants to eat cookies that have been on the floor.

A (1:00)

Five second rule. Yeah. All right. So the s&P 500 is an index that measures the top 500 companies and how they perform. And standard and poor. That's who's running this thing. And so an index fund, when you think about it, Ken, we talk about mutual funds a lot. We're talking about a giant group of stocks pooled together. Investors pool their money to purchase these funds and shares. And so an index fund is a type of mutual fund that buys stock in these 500 companies. And when we think about mutual funds, we have the actively managed, professionally managed funds that we talk about a lot on the show. You work with a smartvestor pro, an investing professional. They purchase the funds for you. And then there's the S and P, which is considered a passive form of investing. These are passively managed funds because it's just tracking the index. There's no one that is handpicking the funds and companies that go into this. They're just tracking the top 500 companies. And the S&P 500 now represents about 80% of the total stock market value. That's right. If you're talking about the largest companies, these are large cap companies, companies with a large market capitalization. If you invest in the s and P500, your return is going to mirror whatever those 500 companies do. And you will own all 500 stocks in that index. If you have AN S&P 500, the average annual return, when you look at the history of this thing, has been around 10 to 12% since its inception. So when we say on the show, hey, if you invest this much, you expect a 10 to 12% return, it's not out of thin air. This is not our opinion. This is just based on the historical average annual return of the S&P 500. Some years it's going gangbusters like we've seen the past few years. Some years it's going to be down, but over time we've seen to plus 10 to 12%. And so the pros of this are you're diversified across investments. When you think about, you know, 500 companies, 11 major industries, so you're reducing your risk since your money isn't dependent on one fund's performance. And they're pretty predictable because it's going to do what the market's doing.