The S&P 500, also known as the Standard & Poor’s 500, is a stock market index that tracks the performance of 500 large-cap publicly traded companies in the United States. It is widely considered a benchmark for the overall U.S. stock market. The index is weighted by market capitalization, meaning larger companies have a greater influence on the index’s value. As a leading indicator of the stock market and the economy, the S&P 500’s performance is closely watched by investors and often reported in financial media. Many investment professionals use it as a benchmark to measure portfolio performance, and numerous index funds and ETFs seek to replicate the S&P 500. In this article, we explore the S&P 500’s historical average returns (both nominal and inflation-adjusted), how it has fluctuated over time, and how those returns compare to other major asset classes like global stocks, bonds, and real estate.
Historical average return of the S&P 500 and its fluctuations over time
Here is the complete table of the annual returns for the S&P 500 dating back to 1928, including a comparison to other financial assets:
| Year | S&P 500 (includes dividends) | 3-month T.Bill | US T. Bond | Baa Corporate Bond | Real Estate | Gold* |
| 1928 | 43.81% | 3.08% | 0.84% | 3.22% | 1.49% | 0.10% |
| 1929 | -8.30% | 3.16% | 4.20% | 3.02% | -2.06% | -0.15% |
| 1930 | -25.12% | 4.55% | 4.54% | 0.54% | -4.30% | 0.10% |
| 1931 | -43.84% | 2.31% | -2.56% | -15.68% | -8.15% | -17.38% |
| 1932 | -8.64% | 1.07% | 8.79% | 23.59% | -10.47% | 21.28% |
| 1933 | 49.98% | 0.96% | 1.86% | 12.97% | -3.81% | 27.26% |
| 1934 | -1.19% | 0.28% | 7.96% | 18.82% | 2.91% | 31.75% |
| 1935 | 46.74% | 0.17% | 4.47% | 13.31% | 9.77% | 0.43% |
| 1936 | 31.94% | 0.17% | 5.02% | 11.38% | 3.22% | 0.09% |
| 1937 | -35.34% | 0.28% | 1.38% | -4.42% | 2.56% | -0.23% |
| 1938 | 29.28% | 0.07% | 4.21% | 9.24% | -0.87% | 0.17% |
| 1939 | -1.10% | 0.05% | 4.41% | 7.98% | -1.30% | -1.23% |
| 1940 | -10.67% | 0.04% | 5.40% | 8.65% | 3.31% | -1.66% |
| 1941 | -12.77% | 0.13% | -2.02% | 5.01% | -8.38% | 0.00% |
| 1942 | 19.17% | 0.34% | 2.29% | 5.18% | 3.33% | 0.00% |
| 1943 | 25.06% | 0.38% | 2.49% | 8.04% | 11.45% | 0.00% |
| 1944 | 19.03% | 0.38% | 2.58% | 6.57% | 16.58% | 0.00% |
| 1945 | 35.82% | 0.38% | 3.80% | 6.80% | 11.78% | 2.54% |
| 1946 | -8.43% | 0.38% | 3.13% | 2.51% | 24.10% | 0.00% |
| 1947 | 5.20% | 0.60% | 0.92% | 0.26% | 21.26% | 0.00% |
| 1948 | 5.70% | 1.05% | 1.95% | 3.44% | 2.06% | 0.00% |
| 1949 | 18.30% | 1.12% | 4.66% | 5.38% | 0.09% | -8.70% |
| 1950 | 30.81% | 1.20% | 0.43% | 4.24% | 3.64% | 9.56% |
| 1951 | 23.68% | 1.52% | -0.30% | -0.19% | 6.05% | 0.00% |
| 1952 | 18.15% | 1.72% | 2.27% | 4.44% | 4.41% | -0.35% |
| 1953 | -1.21% | 1.89% | 4.14% | 1.62% | 11.52% | 0.69% |
| 1954 | 52.56% | 0.94% | 3.29% | 6.16% | 0.92% | 0.57% |
| 1955 | 32.60% | 1.73% | -1.34% | 2.04% | 0.00% | -0.03% |
| 1956 | 7.44% | 2.63% | -2.26% | -2.35% | 0.91% | -0.11% |
| 1957 | -10.46% | 3.23% | 6.80% | -0.72% | 2.72% | -0.11% |
| 1958 | 43.72% | 1.77% | -2.10% | 6.43% | 0.66% | 0.43% |
| 1959 | 12.06% | 3.39% | -2.65% | 1.57% | 0.11% | 0.00% |
| 1960 | 0.34% | 2.88% | 11.64% | 6.66% | 0.77% | 0.48% |
| 1961 | 26.64% | 2.35% | 2.06% | 5.10% | 0.98% | -0.06% |
| 1962 | -8.81% | 2.77% | 5.69% | 6.50% | 0.32% | -0.06% |
| 1963 | 22.61% | 3.16% | 1.68% | 5.46% | 2.14% | -0.40% |
| 1964 | 16.42% | 3.55% | 3.73% | 5.16% | 1.26% | 0.03% |
| 1965 | 12.40% | 3.95% | 0.72% | 3.19% | 1.66% | 0.06% |
| 1966 | -9.97% | 4.86% | 2.91% | -3.45% | 1.22% | 0.03% |
| 1967 | 23.80% | 4.31% | -1.58% | 0.90% | 2.32% | -0.51% |
| 1968 | 10.81% | 5.34% | 3.27% | 4.85% | 4.13% | 12.47% |
| 1969 | -8.24% | 6.67% | -5.01% | -2.03% | 6.99% | 5.01% |
| 1970 | 3.56% | 6.39% | 16.75% | 5.65% | 8.22% | -9.45% |
| 1971 | 14.22% | 4.33% | 9.79% | 14.00% | 4.24% | 16.69% |
| 1972 | 18.76% | 4.07% | 2.82% | 11.41% | 2.98% | 48.78% |
| 1973 | -14.31% | 7.03% | 3.66% | 4.32% | 3.42% | 72.96% |
| 1974 | -25.90% | 7.83% | 1.99% | -4.38% | 10.07% | 66.15% |
| 1975 | 37.00% | 5.78% | 3.61% | 11.05% | 6.77% | -24.80% |
| 1976 | 23.83% | 4.97% | 15.98% | 19.75% | 8.18% | -4.10% |
| 1977 | -6.98% | 5.27% | 1.29% | 9.95% | 14.65% | 22.64% |
| 1978 | 6.51% | 7.19% | -0.78% | 3.14% | 15.72% | 37.01% |
| 1979 | 18.52% | 10.07% | 0.67% | -2.01% | 13.74% | 126.55% |
| 1980 | 31.74% | 11.43% | -2.99% | -3.32% | 7.40% | 15.19% |
| 1981 | -4.70% | 14.03% | 8.20% | 8.46% | 5.10% | -32.60% |
| 1982 | 20.42% | 10.61% | 32.81% | 29.05% | 0.56% | 15.62% |
| 1983 | 22.34% | 8.61% | 3.20% | 16.19% | 4.75% | -16.80% |
| 1984 | 6.15% | 9.52% | 13.73% | 15.62% | 4.68% | -19.38% |
| 1985 | 31.24% | 7.48% | 25.71% | 23.86% | 7.47% | 6.00% |
| 1986 | 18.49% | 5.98% | 24.28% | 21.49% | 9.61% | 18.96% |
| 1987 | 5.81% | 5.78% | -4.96% | 2.29% | 7.88% | 24.53% |
| 1988 | 16.54% | 6.67% | 8.22% | 15.12% | 7.21% | -15.26% |
| 1989 | 31.48% | 8.11% | 17.69% | 15.79% | 4.38% | -2.84% |
| 1990 | -3.06% | 7.49% | 6.24% | 6.14% | -0.69% | -3.11% |
| 1991 | 30.23% | 5.38% | 15.00% | 17.85% | -0.16% | -8.56% |
| 1992 | 7.49% | 3.43% | 9.36% | 12.17% | 0.82% | -5.73% |
| 1993 | 9.97% | 3.00% | 14.21% | 16.43% | 2.16% | 17.68% |
| 1994 | 1.33% | 4.25% | -8.04% | -1.32% | 2.51% | -2.17% |
| 1995 | 37.20% | 5.49% | 23.48% | 20.16% | 1.80% | 0.98% |
| 1996 | 22.68% | 5.01% | 1.43% | 4.79% | 2.42% | -4.59% |
| 1997 | 33.10% | 5.06% | 9.94% | 11.83% | 4.02% | -21.41% |
| 1998 | 28.34% | 4.78% | 14.92% | 7.95% | 6.45% | -0.83% |
| 1999 | 20.89% | 4.64% | -8.25% | 0.84% | 7.68% | 0.85% |
| 2000 | -9.03% | 5.82% | 16.66% | 9.33% | 9.28% | -5.44% |
| 2001 | -11.85% | 3.39% | 5.57% | 7.82% | 6.67% | 0.75% |
| 2002 | -21.97% | 1.60% | 15.12% | 12.18% | 9.56% | 25.57% |
| 2003 | 28.36% | 1.01% | 0.38% | 13.53% | 9.82% | 19.89% |
| 2004 | 10.74% | 1.37% | 4.49% | 9.89% | 13.64% | 4.65% |
| 2005 | 4.83% | 3.15% | 2.87% | 4.92% | 13.51% | 17.77% |
| 2006 | 15.61% | 4.73% | 1.96% | 7.05% | 1.73% | 23.20% |
| 2007 | 5.48% | 4.35% | 10.21% | 3.15% | -5.40% | 31.92% |
| 2008 | -36.55% | 1.37% | 20.10% | -5.07% | -12.00% | 4.32% |
| 2009 | 25.94% | 0.15% | -11.12% | 23.33% | -3.85% | 25.04% |
| 2010 | 14.82% | 0.14% | 8.46% | 8.35% | -4.12% | 29.24% |
| 2011 | 2.10% | 0.05% | 16.04% | 12.58% | -3.88% | 12.02% |
| 2012 | 15.89% | 0.09% | 2.97% | 10.12% | 6.44% | 5.68% |
| 2013 | 32.15% | 0.06% | -9.10% | -1.06% | 10.72% | -27.61% |
| 2014 | 13.52% | 0.03% | 10.75% | 10.38% | 4.51% | 0.12% |
| 2015 | 1.38% | 0.05% | 1.28% | -0.70% | 5.21% | -12.11% |
| 2016 | 11.77% | 0.32% | 0.69% | 10.37% | 5.31% | 8.10% |
| 2017 | 21.61% | 0.93% | 2.80% | 9.72% | 6.21% | 12.66% |
| 2018 | -4.23% | 1.94% | -0.02% | -2.76% | 4.53% | -0.93% |
| 2019 | 31.21% | 1.55% | 9.64% | 15.33% | 3.69% | 19.08% |
| 2020 | 18.02% | 0.09% | 11.33% | 10.41% | 10.35% | 24.17% |
| 2021 | 28.47% | 0.06% | -4.42% | 0.93% | 18.91% | -3.75% |
| 2022 | -18.01% | 4.42% | -17.83% | -14.49% | 7.30% | 0.55% |
| 2023 | 26.06% | 5.07% | 3.88% | 8.74% | 5.68% | 13.26% |
| 2024 | 24.88% | 4.97% | -1.64% | 1.74% | 4.24% | 25.96% |
| * Gold prices, prior to 1971, were fixed and with the gold standard in place, and were mostly stable. |
Over the long run, the S&P 500 has delivered impressively strong returns. Using data back to 1928, the average annual total return of the S&P 500 (including reinvested dividends) is about 10% in nominal terms. In practical terms, this means that over many decades investors have roughly doubled their money (100% gain) every 7–8 years on average with the S&P 500. Of course, this is an average – actual year-to-year returns vary widely and can deviate far from that 10% benchmark.
Importantly, that 10% figure is before adjusting for inflation. Inflation has historically averaged around 3% per year in the U.S., which reduces the real purchasing power of investment gains. Adjusting for inflation, the S&P 500’s real annual return has been on the order of 6%–7% over the long term. In other words, the market’s growth has outpaced inflation by several percentage points, enabling significant increases in wealth in terms of real buying power.
These averages mask a very turbulent history. The S&P 500’s journey from the 1920s to today has seen booms and busts rather than a smooth 10% each year. There have been numerous bull markets (extended periods of rising prices) and bear markets (periods of falling prices or crashes) along the way:
- In the Great Depression era, the index lost nearly 80% of its value from 1929 to 1932, including brutal years like 1931 (–44%).
- During the post-World War II boom and into the 1950s and 1960s, the market saw strong gains (the 1950s alone delivered an astounding +19% annualized).
- The 1970s brought stagflation and volatility – e.g. 1974 saw the S&P 500 plunge –25.9%, one of its worst years – amid high inflation and recession, but by the end of that decade the index recovered.
- The dot-com crash of the early 2000s and the Global Financial Crisis of 2008–2009 led to significant drawdowns (the S&P 500 fell ~37% in 2008). In those bear markets, losses from peak to trough exceeded 50% of the index’s value.
- Conversely, there have been powerful rallies. From the depths of the financial crisis in March 2009, a historic bull market ran for over a decade, gaining over 300% by its peak in early 2020. This bull run was only interrupted by the brief but sharp pandemic-induced crash in February–March 2020.
More recently, after the COVID-19 crash in March 2020, the S&P 500 mounted a remarkable recovery. It surged through 2020 and 2021 to reach new all-time highs, fueled by low interest rates and robust corporate earnings (the index gained +16% in 2020 and +28% in 2021). In 2022, however, the market hit a rough patch: the S&P 500 ended the year down –18%, its worst annual performance since 2008, as high inflation and rising interest rates weighed on both stocks and bonds. Yet in 2023, the index bounced back strongly with a total return of roughly +26% (driven by a surge in tech megacaps and cooling inflation), followed by another above-average gain of +24.9% in 2024 (as of year-end). Such volatility underscores that while the long-term average is ~10% per year, actual returns in any given year can swing dramatically – double-digit gains or losses are not uncommon.
One way to appreciate the long-term growth of the S&P 500 is to consider a simple investment case: If you had invested $100 in the S&P 500 at the start of 1928, and reinvested all dividends, by the end of 2024 your investment would be worth approximately $983,000 (nominal). This nearly 10,000-fold increase in value reflects the power of compounding returns over 96+ years. Even after accounting for inflation, the growth is enormous – that same $100 would be worth on the order of $30,000 in real 1928 dollars (i.e. how much purchasing power it gained). This example vividly demonstrates how the S&P 500 has historically been a tremendous long-term wealth generator, despite the bumps along the way.
It’s important to note that past performance is not indicative of future results, and the ride was anything but smooth. The S&P 500 went through periods of severe decline that tested investors’ resolve. Declines of 30%, 40%, or even more have occurred multiple times. But over multi-decade horizons, the overall trajectory has been strongly upward, rewarding patient investors.
Factors that can affect the S&P 500’s return
Many factors influence the S&P 500’s performance in any given period. Key drivers include:
- Economic Conditions: The health of the overall economy—measured by indicators like GDP growth, employment, and consumer spending—directly impacts corporate earnings and stock prices. Strong economic growth tends to bolster the S&P 500 (as companies’ profits rise), while recessions or slowdowns can hurt returns. For example, swift recoveries in the economy often coincide with bull markets, whereas periods like 2008 or 2020 when the economy contracted saw sharp market downturns.
- Company Performance: Since the index is composed of 500 companies, their individual business performance (revenues, earnings, innovation, etc.) aggregates into the S&P’s return. Strong earnings growth or positive surprises from major companies can lift the index, whereas scandals or profit misses from large constituents can drag it down. Given the S&P 500’s market-cap weighting, the largest companies (such as Apple, Microsoft, etc.) have an outsized effect – if a few of the biggest firms soar or slump, it significantly moves the index.
- Interest Rates: Changes in interest rates have a profound effect on stock valuations. When the Federal Reserve raises interest rates, borrowing costs increase for businesses and consumers, which can slow economic growth and make bonds relatively more attractive than stocks. This often puts downward pressure on the S&P 500. Conversely, falling interest rates (or low rates in general) tend to be a tailwind for stocks, as cheaper borrowing can boost corporate investment and spending. The ultra-low interest rates from 2009–2021, for instance, contributed to strong equity performance, while the Fed’s rate hikes in 2022 created headwinds for the market.
- Inflation: Inflation erodes the purchasing power of future earnings. Moderate inflation is generally manageable (and often coincides with economic growth), but high inflation can hurt stock returns in two ways: by squeezing consumer spending and corporate profit margins, and by prompting higher interest rates. The 1970s is a classic example – high inflation coincided with very mediocre stock market performance. In 2022, inflation spiked to ~40-year highs, which contributed to the S&P 500’s decline that year. On the other hand, a low-inflation environment (like the 2010s) can be favorable for stocks. Overall, inflation is a key factor in determining real returns.
- Political and Geopolitical Events: Major events such as wars, geopolitical tensions, elections, and regulatory changes can create uncertainty or shifts in investor sentiment. The stock market dislikes uncertainty; events like trade wars, Brexit, or geopolitical conflicts often cause short-term volatility. Even U.S. elections can sway the market, as different policies (tax rates, regulations, spending plans) affect business prospects. Generally, while isolated events can jolt markets, the effect on long-term returns tends to be subdued – the market usually rebounds once uncertainty clears or the impact of the event becomes clearer.
- Market Sentiment and Psychology: Investor sentiment – fear or greed – can drive the S&P 500 above or below its fundamental value in the short term. During euphoric times, stocks may become overvalued (e.g. the late-1990s tech bubble) and during panics, they may plunge excessively (e.g. the 2008 crash or March 2020 COVID panic). Behavioral factors and momentum can thus amplify moves. Over the long run, however, sentiment tends to even out and fundamentals reassert themselves.
- Technological and Structural Changes: Innovations and sector shifts can impact the index’s composition and returns. For instance, the rise of the tech sector in the past few decades has made information technology the largest component of the S&P 500. Companies that lead technological advances (FAANG stocks, for example) have driven a significant portion of recent returns. Disruptive technologies can create new winners (and render old industries obsolete), affecting the index’s performance. Additionally, structural changes like stock buybacks or increased passive investing may also influence returns.
It’s worth noting that these factors are often interrelated and complex. For example, a geopolitical event might spur a jump in oil prices, causing inflation to rise and prompting central bank action – all of which collectively influence the market. The key takeaway for investors is that short-term returns are unpredictable and driven by myriad factors, whereas long-term returns tend to mirror the growth of corporate earnings and the economy.
The impact of inflation on the S&P 500’s return over time
Inflation can have a significant impact on the real value of the S&P 500’s returns. As mentioned, the historical ~10% annual return is nominal – not adjusted for inflation. If inflation runs at, say, 3% per year, an investor’s real return might be around 7%, since roughly 3% of the gain is lost to higher prices of goods and services.
Over long periods, even moderate inflation adds up. For perspective, $100 invested in the S&P 500 in 1928 grew to about $982,000 by 2024 in nominal terms, but in inflation-adjusted terms it’s equivalent to roughly $30,000 in 1928 dollars. That real value is of course still a huge increase from $100 – demonstrating the market’s wealth-building power – but it illustrates that roughly 97% of the nominal gain was eroded by 96 years of inflation. In other words, inflation turned what would have been a 10,000-fold increase into about a 300-fold increase in real purchasing power.
When inflation is high, it can hurt stock valuations in the short run. Companies face higher input costs and potentially higher interest rates (which increase expenses and discount future earnings more heavily). For example, during 1973–74 the combination of rising inflation and oil price shocks contributed to a nearly 50% drop in the S&P 500 over two years. Similarly, in 2022 U.S. inflation jumped above 8%, and we saw the S&P 500 fall by about 18% that year, with high-growth tech stocks (whose valuations are most sensitive to interest rates) hit especially hard.
Conversely, in periods of low or stable inflation, stocks often do well because economic growth isn’t creating cost pressures and interest rates can stay low. The decade from 2010–2019 had relatively low inflation (generally in the 1%–3% range) and the S&P 500 returned roughly 13% annualized over that span – well above its long-term average.
The relationship between inflation and stock returns is not always one-to-one. Stocks can sometimes be a good inflation hedge, especially companies that can raise prices alongside inflation. Moderate inflation often coincides with growth. But extreme inflation (or deflation) tends to be harmful. The key point for long-term investors is to focus on real returns: ultimately, what matters is how much your investment grows after inflation, since that determines the increase in actual buying power.
Comparison of the S&P 500’s return to other popular stock market indices (U.S. and Global)
While the S&P 500 is the most referenced U.S. market benchmark, it’s helpful to compare its performance to other stock indices to see how it stacks up:
- Dow Jones Industrial Average (DJIA): A price-weighted index of 30 large blue-chip U.S. companies. While similar in direction to the S&P 500, its smaller number of stocks and different weighting can lead to deviations. Over the long term, the Dow has slightly trailed the S&P 500.
- NASDAQ Composite: Heavily tech-weighted and growth-focused. The NASDAQ tends to outperform during tech booms but underperform in downturns. Long-term returns have been strong, but with significantly higher volatility.
- Russell 2000: A benchmark of small-cap U.S. companies. Small caps have historically earned slightly higher returns than large caps, but with greater risk. They can shine during recoveries and economic expansions but struggle in downturns.
- MSCI World Index: Tracks developed markets globally, including the U.S., Europe, Japan, and others. Returns have been slightly lower than the S&P 500’s over the past few decades, largely due to U.S. outperformance in tech.
- Other International Indices: FTSE 100 (UK), Nikkei 225 (Japan), and others reflect localized performance and economic cycles. Japan’s Nikkei, for instance, has yet to return to its 1989 peak. This reinforces the U.S. market’s consistent strength compared to many global counterparts.
The S&P 500 has often outpaced these indices, especially in recent years, though international diversification still plays a valuable role in reducing regional risks and exposure.
Comparison of the S&P 500’s return to other popular asset classes
In addition to other stock indices, investors often compare stock market returns to entirely different asset classes like bonds, real estate, or commodities. Historically, the S&P 500 has provided higher long-term returns than most other mainstream asset classes, albeit with greater volatility. Let’s examine a few:
Bonds: Bonds are generally lower-risk, lower-return investments compared to stocks. For example, long-term U.S. Treasury bonds (10-year Treasuries) have historically returned around 5% per year on average since 1928. Corporate bonds yield a bit more. These are much lower than the ~10% from stocks. The trade-off is that bonds have less volatility and tend to hold up or even gain value during equity bear markets. In 2022, however, even bonds had a rough year. Over the very long run, though, bonds’ modest returns mean they dramatically lag stocks in wealth accumulation. A telling statistic: $100 in 10-year Treasuries in 1928 would be worth only about $7,200 by 2024, versus nearly $1 million for the same $100 in the S&P 500. This huge gap is the essence of the equity risk premium.
Real Estate (Housing): In terms of home price appreciation, U.S. housing values have risen at an average rate of around 4–5% per year nominally over many decades. That’s roughly 1–2% above the inflation rate, leading to a modest real return. Unlike stocks, housing returns also come with utility and the potential for rental income. Direct ownership also entails costs. The key point is that housing price appreciation alone has significantly lagged stock market growth in the U.S.
Real Estate (REITs): A Real Estate Investment Trust (REIT) allows investment in real estate through the stock market. REITs typically own portfolios of commercial properties and are required to pay out most of their income as dividends. From 1972 to 2019, U.S. equity REITs delivered about 11.8% average annual returns, slightly higher than the S&P 500’s ~10.6% over the same period. REITs benefit from rental income and rising property values. They offer stock-like returns and are a strong option for diversification.
Commodities (Gold): Gold is often seen as a store of value or hedge. From the end of the gold standard (1971) to present, gold’s nominal returns have been positive but not spectacular – roughly 5% annualized, and about 2% real. Gold does not generate income and tends to have long stretches of under-performance. Other commodities like oil are similarly cyclical and volatile.
Overall, the S&P 500’s ~10% historical return towers over the ~5% from long-term Treasury bonds and the ~3% from short-term Treasury bills. Real estate returns vary widely depending on the vehicle (homes vs. REITs), and commodities tend to under-perform over long periods. These comparisons underscore the S&P 500’s powerful role as a long-term growth engine.
Investing in the S&P 500 via Index Funds or ETFs
Given the attractive long-term returns of the S&P 500, many investors seek to gain exposure to the index in their own portfolios. The most common way to do this is through index funds or exchange-traded funds (ETFs) that replicate the S&P 500.
- Index Funds: Mutual funds that hold all 500 stocks in the same weightings as the index. They’re a low-cost, passive investment vehicle and are purchased at end-of-day prices.
- ETFs: Trade like stocks and also track the S&P 500. Examples include SPY and VOO. They are known for low expense ratios, intraday liquidity, and tax efficiency.
Both types of funds provide an easy, low-cost way to invest in the S&P 500. By using them, an investor gains instant diversification across 500 large companies. Historically, simply “buying the index” and holding on has outperformed the majority of active stock pickers over extended periods.
When investing in an S&P 500 fund, it’s important to have a long-term horizon. Volatility is a given in the short term. Strategies like dollar-cost averaging can help mitigate bad timing risk.
Keep in mind, the S&P 500 covers only U.S. large-cap stocks. To build a balanced portfolio, many investors also include small-cap, international stocks, bonds, and real estate, depending on their risk profile and goals.
Risks and Considerations of Investing in the S&P 500
While the S&P 500 has historically been rewarding, investing in it (or any stock index) comes with risks and potential drawbacks:
- Market Risk: The S&P 500 is volatile. It can and will experience downturns. Losses of 30% or more have happened multiple times.
- Company/Sector Risk: Despite diversification, large individual companies or sectors (like tech) can disproportionately impact the index.
- Concentration Risk: As of 2024, the top 10 stocks account for roughly one-third of the index. Performance is increasingly tied to a handful of megacap firms.
- Inflation Risk: Inflation erodes real returns. The S&P 500 historically outpaces inflation, but not always in the short term.
- Fee and Tracking Error (Minor): Most index funds charge low fees, but they still reduce returns slightly. Reputable providers minimize this risk.
- Short-Term Horizon Risk: If you need funds soon, the S&P 500 is risky due to volatility. It’s best suited for long-term investing.
- Diversification Limits: The index includes only U.S. large-cap stocks. A well-rounded portfolio should also include other asset classes and global exposure.
Despite these risks, the S&P 500 remains a cornerstone for many investors because of its long track record, broad exposure, and strong returns. The key is to invest with a strategy and time horizon that matches your goals and tolerance for risk.
Key Takeaways from Nearly a Century of Data
The S&P 500’s average annual return of around 10% (7% after inflation) over the last century highlights the wealth-building potential of equities. When compared to other benchmarks – global stocks, bonds, real estate – the S&P 500 has been a standout performer, albeit with notable volatility. By understanding its historical behavior, the impact of inflation, and how it compares to other investments, investors can better appreciate the role this index can play in their portfolios.
Equipped with low-cost index funds and a long-term mindset, even everyday investors can harness the power of the S&P 500 as part of a diversified strategy. Ultimately, the S&P 500’s history teaches us about the resilience of the U.S. stock market and the rewards that patience and prudent investing can reap over time.