Investing can sometimes feel like gambling at a Las Vegas Casino. You buy the hot fund it goes up then, crashes down causing you to lose money. So you switch funds only to have your new fund do the same thing as your last fund. What is happening to your retirement nest egg? All you want to do is get good returns, not lose your shirt and retire one day. How hard can it really be to achieve that? This is a very common thing that happens to many investors whether the fund they own is a taxable or tax exempt fund. The S&P 500 is the solution to this problem and will always over time give you some of the best returns on earth.

How old is the S&P 500 and what is its origin?

The S&P 500 is considered an index fund that invests almost solely in U.S.-based companies. Additionally, the Standard and Poor was originally created in the year 1923. But back then it was only known as the S&P 90, which given its current name shows you how far the American economy has come in the last 80 years or so. For a little over two decades this index was in existence with only 90 companies in it until it was finally changed in the year 1957 to the format we all recognize, the S&P 500.

What is the S&P 500?

Since the S&P 500 is supposed to be 500 companies from a diverse range of industries representing roughly 70% of all publicly traded stocks it has to have a selection committee to determine which companies will be part of the index. The companies the committee selects are representative of the publicly-traded industries in the United States economy utilizing market size, liquidity, and sector representation as some of the criteria.

Why is the S&P 500 so consistent and successful?

What makes the S&P 500 index to unique is that they don't presume to have greater wisdom than the collective market but instead try to channel the markets wisdom to your advantage. Many mutual, hedge and other types of actively managed funds are run by money managers whose aim is to beat the market by buying and selling individual stocks or other investments in their own unique combinations. There are thousands of managers and funds working night and day on this, some really do beat the market each year. Those are the ones who end up getting rave reviews by the media, investment magazines and authors. What you don't hear about is that nearly all fund managers will fail horribly at consistently beating the market and no one will ever notice or hear about them except the suckers who own shares in that fund.

How do we know it is so hard for funds to beat the overall market?

In 2006 economist Laurent Barras and Russell Wermers of the University of Maryland and Oliver Scalliet of the University of Geneva in Switzerland conducted an in-depth research project to understand how many funds actually beat the market by a statistically significant amount. Their findings were astounding at best, in the year 1990 only 14% of active fund managers were able to beat the market by a statistically significant margin. Basically, that means that there was no evidence that year that they are able to beat the market. Fast forward 16 years to 2006 and the number of funds had that could beat the market by a statistically significant margin was only 0.6% of all funds. That means, 99.4% of all active funds did not beat the market for their investors. If they had only done one small thing, own the S&P 500 then, their returns would always be the best since not even 1% of the market can beat this powerful index.

How well over time has the S&P 500 really done?

So historically, how well has the S&P held up over time. As history has proven, only time proves if an investment is good or not. So over time what has the index proven to us that merits us trusting our money and possibly future on? So to find that our we have to do a little math which thanks to the computer age makes it very simple. The way to determine the returns on an annual basis that is meaningful to us is by using something called, CAGR or compound annual growth rate. Basically, it allows us a more accurate way of determining what the yearly return on a stock or investment is so that it cannot be misleading from returns that are highly erratic. Even though the data available for the S&P 500 is started at 1957, because the S&P consists of basically the stock market as a whole a very wise group of people got all the necessary information to calculate what your returns would have been starting in 1871. So here is how you would have fared in different time periods. Of course some of the periods are impossible to invest in but they show you a pattern that is important to notice, the consistency of the general market to grow.

1871-2009 Annual Return Per Year was 6.68%, $1 invested then is worth $7,166 today.
1900-2009 Annual Return Per Year was 6.28%, $1 invested then is now worth $810.
1925-2009 Annual Return Per Year was 6.79%, $1 invested is now worth $267.18.
1945-2009 Annual Return Per Year was 6.81%, $1 invested then is now worth $72.58.
1965-2009 Annual Return Per Year was 4.73%, $1 invested is worth $8 today.
1975-2009 Annual Return Per Year was 7.34%, $1 invested is now worth $11.92
1995-2009 Annual Return Per Year was 5.47%, $1 invested then is now $2.22
2000-2009 Annual Return Per Year was -3.42%, $1 invested then is now worth $0.71
2003-2009 Annual Return Per Year was 2.88%, $1 invested is now worth $1.22

So what we see is that over time, we will get basically 5 to 6 percent with the exception of of the partial data from 2000-2009 which given the recovery of 2010, we can say that for the most part, you always get very good returns from the overall market. There will be ups and downs but in the end over time you will be fine. Taking the data above and more I did the following three analysis's, if at a randomly selected starting time period between 1871-2009, you invested for 25, 40 and 50 years what would you have? The reason we choose those years is because, most people who save for retirement do so for 25, 40 or 50 years, obviously sometimes less or more but this is pretty standard. So if you put all your money into the S&P 500 for that long, what would you have to show for it? After 25 years, on average you would have returned 6.83% per year, after 40 years, 6.61% per year and after 50 years, 6.47% annually. So that is pretty consistent and reliable.

This is something that almost no fund manager can do for you over your entire life. This means, instead of putting your money in a fund that WILL over time, not outperform the market unless you are that 0.6% or basically top 1% you should instead just buy the S&P 500, hold on to it and in 25, 40 or 50 years look at how much money you have. Your only job with this new strategy is to find ways to put more money into your S&P investment so that it has even more money to grow with and give you the retirement and returns that no other investment can give you, some of the best returns around.

Why the S&P500 is a great investment