The S&P 500 index has seen remarkable success in 2023, closing above 4,700 for the first time since January 2022. With a year-to-date increase of approximately 23%, it is no surprise that investors are contemplating whether to allocate more funds to a fund that tracks this index. Vanguard founder John Bogle has advocated for the long-term benefits of owning a low-cost fund that tracks the stock market, with the S&P 500 being a prominent example. As the name suggests, the S&P 500 consists of 503 large-cap equity stocks, and its performance is primarily determined by the market capitalization of its constituent companies. The composition of the index is subject to change, as exemplified by the recent inclusion of ride-hailing company Uber and the removal of Sealed Air Corp.
Passive funds that track the S&P 500 index offer investors a convenient and accessible option. According to Bryan Armour, director of passive strategies research for North America at Morningstar, the largest ETFs in the world are S&P 500 ETFs. Additionally, investors can choose to include S&P 500-focused mutual funds in their portfolios. One notable distinction between ETFs and mutual funds lies in their cost. Research suggests that lower costs are one of the best predictors of future success, making ETFs a favored choice due to their affordability compared to mutual funds. Passive strategies have also demonstrated better long-term returns, making index-based funds an appealing starting point for investors looking to build their wealth. Todd Rosenbluth, head of research at VettaFi, emphasizes the effectiveness of index-based funds such as those tied to the S&P 500.
Predictions for 2024
While 2023 has seen the S&P 500’s impressive performance, it is important to approach predictions for the future with caution. Experts participating in a CNBC Fed Survey anticipate a modest gain of less than 2% for the index in 2024, with an average expectation that it will surpass 5,000 for the first time but not until 2025. HSBC predicts the index will reach 5,000 in 2024, potentially surpassing this level if a recession does not occur. On the other hand, Raymond James takes a more conservative stance and predicts a level of 4,850 due to their cautious earnings outlook. The success of the S&P 500 this year is partly attributed to the performance of key technology giants, including Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla. Raymond James predicts that these technology companies (excluding Tesla) will continue to be influential but less dominant in 2024 compared to this year.
Financial experts generally view investing in an S&P 500 index fund as a sound strategy, although it is vital to consider diversification. Douglas Boneparth, a certified financial planner and president of Bone Fide Wealth, notes that while the S&P 500 provides exposure to the largest companies, it excludes small- and mid-size companies and international firms. Consequently, investors should be cautious about reacting to market movements and instead focus on setting a long-term investment strategy. David Rea, president of Salem Investment Counselors, echoes this sentiment by emphasizing the importance of staying invested and selecting funds or ETFs that align with one’s risk tolerance and return objectives. Ted Jenkin, CEO and founder of oXYGen Financial, advises against attempting to outperform the S&P 500, as both individual investors and money managers generally struggle to do so.
The S&P 500 index’s performance in 2023 has attracted investor attention and raised questions about whether to allocate more funds to tracking funds. With the accessibility and affordability of passive funds that track the index, investors have convenient options to consider. However, predictions for 2024 should be approached with caution, as market dynamics are subject to change. It is essential for investors to determine their long-term investment strategy, consider the limitations of index-based funds, and resist the urge to time the market. By adhering to a disciplined approach and recognizing the potential of the S&P 500 as part of a diversified investment portfolio, investors can position themselves for long-term success in the ever-evolving financial landscape.