In last week’s episode we covered an important topic, specifically not comparing your investment returns to that of the S&P 500. We specifically spoke that one ought to remember the Biblical principles that we laid out, which were:
- Diversify your investments!
- Remember that slow and steady wins the race (with investing)
- Hard work and discipline brings about success (and God’s blessings!)
- Faithfulness in our investing is key!
In today’s episode it would be good to add in another key verse when it comes to getting understanding and learning about investing:
- Proverbs 4:5 – “Get wisdom; get insight; do not forget, and do not turn away from the words of my mouth.”
And that is what today will be about. We want to get you some wisdom & understanding to a parallel question to last week’s episode that comes our way: Should I invest in an S&P 500 index fund?
What is an index fund?
- An index fund is an investment that seeks to track the performance of a broad market index, like the S&P 500, the NASDAQ, or other such index.
- Index funds can be in the form of either a Mutual Fund or an Exchange Traded Fund (ETF), and if you have enough money, you could even purchase single stocks and hold them in a portfolio.
How does an index fund work?
- An index fund is created by a company subscribing to a list from companies like the S&P (Standard & Poors). They pay yearly for the privilege of using the name, and for the list of the companies and their relative weighting so that they can go out and replicate that in their portfolio.
How is an index fund different from an actively managed fund?
It’s the difference between active and passive investing!
- An Active Investment, such as an actively managed mutual fund, hires a manager and other investment professionals who selectively choose which companies to include and exclude from their portfolios. They seek to reduce market risk or beat their benchmark/index through buying winners and avoiding losers. While there is no guarantee that the manager will be successful in this endeavor, some managers do this better than others. This is why it’s important to know the track record of the manager and not just the fund.
- Passive Investments, such as most ETFs or indexed mutual funds, seek to mirror the performance of an index. This is accomplished by owning all companies represented within that index. By definition, a passive investment does not use active management. In other words, they are happy to own all the good, the bad, and the ugly within the index. While the costs of this approach to investing are generally very low, there is no way to screen out the ‘bad and the ugly’ investments, especially from a moral perspective.
Are S&P 500 Index Funds a good idea?
From a performance perspective, you can’t beat the S&P 500 over a period of time, because all the returns are coming from just a handful of companies. It is anticipated (see episode with Bob Doll) that that trend is likely to slow in the coming years because actively managed funds are expected to have greater performance than the overall market.
From a cost perspective, indexed funds, like the S&P 500 index, are very inexpensive to operate and manage. One of the biggest factors some investors look at is not only performance, but operating costs of their investments. When you compare the cost of buying a list and replicating a certain weighting of stocks, versus hiring people to investigate companies and to know what is going on with these companies, and then making decisions on whether or not to invest in these companies, it is going to cost more money! Working with real people will cost more than a subscription to a list.
From a risk perspective, the S&P 500 is all stocks. While we might like the return, we might not like the downside (the risk) of just owning stocks. Therefore, owning only the S&P 500 index would probably not be suitable for most investors.
From a moral perspective, you have no control over which companies you own (or do not own) in an index fund. You have ownership interest in companies that actively promote a lifestyle and a worldview which may be contrary, or in conflict with, your Christian worldview and convictions.
Should I invest in an S&P 500 Index Fund?
- It depends! From a Biblical perspective, I don’t love them because you don’t have control. However, for someone who just needs to get market-like returns, and doesn’t want to have to think about what they’re investing in, and isn’t really concerned about making moral decisions about the companies involved, an index fund is one of the cheapest ways of having a diversified stock portfolio. There are benefits from a performance perspective, and even from a psychological perspective to have something in your portfolio that can do really well when just a few companies are exceeding expectations. But at the same time, the psychological benefit is reversed when the S&P 500 is crashing or performing poorly, and you don’t have any buffer (someone in the fund, choosing what to hold, or not hold in the fund).
How Can I Invest in an S&P 500 Index Fund?
Though this is not an endorsement of investing in an S&P 500 index fund, you can learn how to start investing by checking out one of our previous episodes: How to Start Investing (episode 80).
Mutual funds and ETFs are sold by a prospectus. Investors should carefully consider the investment objectives, risks, charges and expenses of the fund or ETF. This and other important information is contained in the prospectus which can be obtained from your financial advisor or the fund company and should be read carefully before investing.
“All things are lawful,” but not all things are helpful.”
Yes, you could choose to invest in an index fund. It might be beneficial to you! But it also might not be beneficial to you!
The best choice is to speak to a financial/investment professional. Why?
- They will ask you the right questions…
- They will seek to understand what your financial goals are…
- They will assess your risk tolerance…
- And they will either guide you toward your next steps, or they could assist in getting you to your next financial/stewardship goal.
- Take advantage of our free personal stewardship reviews so you can take your next steps to being a better steward.
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The topics discussed in this podcast are for general information only and are not intended to provide specific investment advice or recommendations. Investing and investment strategies involve risk including the potential loss of principal. Past performance is not a guarantee of future results.
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