Investing in the stock market can feel vague. And it’s hard to know how well your investments might do. In this post I’ll show you how you can look at a stock chart for a great visual of how the market has done in the past. It’s a great index investing resource to have. While history never repeats itself exactly, the overall patterns repeat…
S&P 500: An Index Investing Resource
This leads us back to the old index concept. As you may have already read or seen in my videos here at Financial Woman, most stock investments in the US are made through index funds. For example, the S&P 500, which you’ve probably heard of. Even though the S&P is an index, it gives a good representation of the overall market and all large stock funds. Here is why:
The stock funds that purchase various companies and, therefore, are not index funds usually have very similar performance to index funds. This is simply because large investment funds must buy large companies since they are investing such huge sums of money.
Department Store Analogy
To make more sense of this, think of walking into a small local craft boutique with $10,000 to spend. You couldn’t spend all of your money in this boutique because there is not enough inventory, and the inventory is not expensive. On the other hand, you could have a pretty good time using that money at Nordstrom® with their large inventory of higher priced, often designer inventory. Similarly, huge stock funds have to buy large companies from a vast inventory to invest all of the billions of dollars that investors and retirement fund managers have given them.
A Simple Tool
Now, index funds, such as the S&P 500, are made up of large companies, as you already know. Since index funds and also funds with various stocks are both invested in large US stocks, and since all stocks tend to move in the same general direction over time, broadly speaking, the performance of all stock funds will be similar. It makes it a good index investing resource. Additionally, this makes the S&P 500 index a simple tool to see visually the past price performance of stock index funds. Especially with the tool I am about to show you.
An Idea of Expectation
Why would you do this? By doing this, you can see the swings in the stock market. This awareness can give you an idea of what you can expect your investments to in the future. Both alleviating the shock factor from large drops, and encouraging putting aside money to grow long term. To reiterate, if you look at what something has done in the past, while it does not repeat itself exactly, over time, it tends to repeat the same overall pattern. You’ll also be able to check the past performance of any other market. For example, bonds, with this resource when using the related index.
A Great Resource
One of the best free index investing resources to look up stock market performance and research investments is morningstar.com. In the video below, I’ll show you how to check the S&P 500 index with a stock chart. First, you’ll see a very short term chart. But, you’ll want to look at a longer term chart, such as a 10 year chart. This will allow you to be aware of long term cycles.
You can see how the S&P 500 has performed over a 10 year time period from mid-2016 and going back to 2006. I like to quote that “A picture paints 1000 words” when suggesting a look at stock charts. In the video, you can see the huge drop in the stock market in 2008! And you can see how it has been going straight up ever since then. These are powerful insights. If you click on “maximum” time frame, you’ll see how this stock index has done going all the way back prior to 1944!
High Value Perspective
Women tend to enjoy processing information visually. While stock charts may seem intimidating initially, they give you a high value visual perspective on how the stock and bond markets move over long periods of time.
Impact of Swings
Remember, over long time periods, the swings in the market have less effect since many years are being averaged. While shorter term, the swings can have a bigger impact on your investments. Especially if you buy into a market near the beginning or end of a long term cycle. For this reason, I always suggest that you check the long term cycle of any type of investment before making it.
In summary, the S&P500 is an index fund that represents the overall stock market in the United States. Looking at a chart of the S&P 500 allows you to see visually how the market has done in the past, making it a good index investing resource. When you’ve seen the swings in the stock markets visually with an awareness that history repeats itself in a similar way, you can make investments from a place of more knowledge.