Why The S&P 500 Is Still The Best Bet For Most Investors

The S&P 500 is a US stock market index that tracks the performance of 500 companies and includes some of the best-known stocks around; names like Apple, Microsoft, Amazon, Facebook, Exxon Mobil, and Berkshire Hathaway. Currently, Apple (AAPL) makes up about 4% of the index followed by Microsoft, Amazon, Facebook, Johnson & Johnson, Berkshire Hathaway, Exxon Mobil, JP Morgan, and Alphabet. At present, these nine stocks make up roughly 20% of the index. In other words, the top 2% of companies in the S&P 500 make up about 20% of its value. The five big tech names: Apple, Amazon, Microsoft, Alphabet, and Facebook comprise about 14% of the index. So about 1% of the companies in the S&P 500 make up nearly 14% of its value. More than 50% of S&P 500 companies are in the information technology, financials, and healthcare sectors. Consumer discretionary stocks, industrials, consumer staples, energy stocks, utilities, real estate, materials, and telecom companies make up the minority. Since the SPY’s inception (SPY is an ETF that tracks the performance of the S&P 500 index) in January 1993, it has returned roughly 9.45% for its investors annually before taxes. SPY is thought to be one of the best ways for investors to get broadly diversified exposure to large-cap stocks. The ETF is very liquid and has some of the lowest fees of any ETF or fund around at about 0.1%. Other ETF’s that offer exposure to S&P 500 stocks are Vanguard S&P 500 ETF (VOO) and iShares Core S&P 500 ETF (IVV). There are other mutual funds that track the performance of the S&P 500 index such as Vanguard’s (VFINX) Index fund and Vanguard 500 Admiral Index fund. VFINX has a 0.14% expense ratio and requires a $3,000 minimum investment. VFINX has a 0.04% expense ratio and requires a minimum investment of $10,000. Investors do not need to worry about foreign stock exposure with SPY as nearly 99% of the companies are in the United States. SPY has nearly $246 billion in assets under management and after taxes and distributions have returned about 19%, 7.5%, 13.46%, and 5.8% annually for the last 1, 3, 5, and 10 years, respectively. At its current price, SPY’s price to earnings ratio is about 19 and its dividend yield is about 1.93%.

S&P 500 Return Data

I looked at every daily and weekly closing price of SPY since January 2015 to see I could find trends in the index to help stock investors and traders. From Friday, January 2, 2015, through Tuesday, November 14, 2017, there were 724 days in which the stock market was open. In those days the S&P 500 index had positive returns on 375 days or about 52% of total trading days and 349 flat or negative returns (48%). The average daily return was 0.034% and the median daily return was 0.03%. The standard deviation of daily returns on the SPY index was 0.79% (meaning on average the SPY’s price fluctuated up or down about 0.79% from the mean return of 0.03% on any given trading day). Weekly average returns on SPY were 0.17% and the standard deviation was 1.57%. During any given trading week since January 2015, the average price on SPY fluctuated up or down about 1.57% from the mean return of 0.17%. The normal distribution ranges of price fluctuations on the S&P 500 index are illustrated below.

In statistics, the normal distribution law states that 68% of all given outcomes will fall within one standard deviation above or below the mean. 95% of all outcomes will fall within two standard deviations above or below the mean and more than 99% of all given outcomes will fall three standard deviations above or below the mean. The SPY daily stock returns will range between 0.75% declines and 0.82% returns about 68% of the time, according to the normal distribution law. In other words, there’s less than a 1% chance that the S&P 500 will rise by at least 2.4% or fall by greater than 2.33% on any given trading day. I think this points to SPY’s stable investment portfolio and low volatility when compared to other ETF’s or stocks.

Monthly Returns

Sometimes stocks sell-off late in the year primarily because of tax loss harvesting in which investors and fund managers sell losses to offset capital gain taxes. I analyzed SPY’s monthly returns since 2015 to see if I could find a pattern in the numbers. Investors will notice the sharp decline in August 2015 (Chinese economic fears) and post-election rallies that buoyed stock markets around the world to new highs. April, May, and July were months in which the S&P rallied in each of the last three years. I didn’t find any significant patterns or trends among SPY’s monthly returns, but the data serves a useful purpose for knowing what months tend to be more volatile in the stock market. Below is a chart illustrating the S&P 500 index returns for the previous three years.

SPY Returns by Day

It would seem reasonable to assume Americans would invest more money in the markets or trade more frequently at the beginning and mid points of the month, which is a typical paycheck cycle for the average American worker. I wanted to test these theories to see if they held true for stock market returns. I analyzed returns for every trading day between January 2, 2015 and Nov. 14, 2017. Here is what I found, and a chart detailing SPY returns by the day of the month.

The data seems to support the fact that stock markets tend to do better at the beginning and midpoints of each month. The average daily return on the 16th was the highest of any other day with daily returns averaging about 0.46%. The 14th and 15th of the month were also positive at 0.14% and 0.19%, respectively. The 1st and 2nd of the month had respectable average returns of 0.22% and 0.19%, respectively. Other good days to trade tended to be the 10th, 26th, and 29th of the month. The worst two average return days were the 24th and 31st of the month. There is no concrete evidence to explain this trading pattern, but the trends should roughly support the theory that markets tend to do better around the 1st and 15th of each month. Lastly, I tested three-day rolling averages to smooth out volatility or any potential skews in the data. Overall, I found that investing in the SPY on any random day is likely to produce returns of 0.03% for any three days stretch after an order is placed.

The S&P 500 is one of the most heavily traded and liquid stock indexes and offers investors broad exposure to many solid large-cap companies. At any given time, it will track the stock market in general. Investors who think the market cannot be beaten or believe in the efficient market hypothesis will find the SPY offers a way to get wide diversification and hedge against single stock risk. Low-cost index investing has long been a successful investment strategy. Many fund managers and traders underperform the broad market indexes because they trade too often or buy when stock prices are too expensive. Dollar cost averaging in a broad market index like SPY, VOO or IVV is a safe bet to produce decent returns over the long-term.

The Next Level

To put yourself in the top tier investors, you should protect the value of your investments and retirement accounts from bear market crashes that historically occur four times during the average working lifetime.

Original Article: Why The S&P 500 Is Still The Best Bet For Most Investors https://seekingalpha.com/a/2gxsw