There is no getting around the S&P 500 chart since October 2020. It kind of smacks you in the face. A 20% run up.
The S&P Index hit a recent high last week after the US Federal Reserve Bank raised interest rates by a quarter of 1% (25 basis points or 0.25%). The move was expected by the “Fed” after the “pause” in April. People continue strong spending as Personal Consumption Expenditures remained steady. Inflation has also subsided as energy prices dropped, supply chains return to normal and people adjusted their spending. Consumer Confidence hit a new high as the public feels confident about their economic prospects. All of which looks good for the general economy. And the S&P index reflects the general economy.
We want to look more closely at the S&P 500 index: what it represents, how it affects your retirement, and how it reflects the larger economy. Black people have a large amount of money invested in retirement plans and government pensions. Many of these funds invest in the S&P 500 index. If you are not watching the S&P 500, you should.
What is the S&P 500 index ? — It is a weighted average of the share price value (market capitalization) of companies. Market capitalization is the number of share times the value, so Apple, Microsoft, Amazon, Google, Facebook and United Healthcare all have a larger share of the S&P 500 than Best Buy, Advance Auto Parts or Sealed Air Corporation. A change in the price of Amazon will change the S&P index value much more than Sealed Air. Amazon’s market capitalization is 100 times larger than Sealed Air.
There are several important reasons to follow the S&P index average:
- It is the quickest and best way to understand the current financial market and what the markets expect in the future from companies. The other is the Federal Reserve interest rate.
- It is the best predictor (not perfect) of the future economy over the next 3-5 years.
- Retirement plans, 401Ks, index ETFs, and passive investors hold a huge amount of S&P 500 index funds and ETFs. They use the S&P 500 as their primary investment strategy.
- The S&P has delivered investment returns between 10%-13% over the long term without the risk of active investing.
- Investing in the S&P 500 is cheap compared to actively managed portfolios and advisors. Active managers can charge 5 to 10 times more than an ETF while delivering the same return.
The S&P 500 index is also the best general measure of what financial markets think about the future of the economy. But what about my retirement?
Lets look at the retirement questions. When you retire, most people want to shift money to more stable and income generating investments such as bond indexes and real estate. Lower risk assets like property, bonds, or gifts for education will let you pay for living expenses and healthcare. Retired people and people close to retirement should not take the risk of losing their savings to a market downturn.
With the relative high in the S&P 500, should you cash out? Now might be the time. At least partially. Based on your age and now long you expect to live(a tough one), you should still have some money in equities like a S&P 500 index fund.
Rich people practice something called: Asset Allocation. They figure out their long-term plans and then balance stocks, bonds and real estate. All different classes of assets.
Ask yourself, do you have too much money invested in the S&P for my retirement? Am I over invested in risky assets like equities and the S&P 500? Should I shift money out to less risky investment and protect myself?
As you age, most people need to shift money to stable investments that will provide for housing and healthcare. The recent high may give you an excellent to do just that. This is chance to shift money out of the S&P index funds to a lower returning but more stable source of income.
What should active investors do?
So, for you active investors, is the 20% run up in equities real? Or is it a return to normal? Should you stick with the S&P or move money to sector funds like tech or consumer-cyclicals ? Or even a lower risk asset class like bonds or cash?
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