Investing in equities for the long term can generate substantial returns for investors who can withstand high levels of volatility. Investing in equities includes risks; as a result, investors can expect to receive an added equity risk premium above and beyond risk-free investments over the long term.
Investing in equity indexes is one way to mitigate some of the risks of single stock exposure in the equity market while still benefiting from equity market premiums over the long term. Indexes are constructed by index providers to include a sample of stocks in a specific market category or stocks representing specified criteria in order to provide a broader equity investment standard for investors. Some of the leading large-cap indexes in the United States include the Russell 1000, the Dow Jones Industrial Average (DJIA) and the S&P 500.
The S&P 500 is one of the market's most widely known indexes for both investment and fund return comparison as a benchmark. With 500 of the leading publicly traded U.S. companies, it provides an ideal investment for investors over the long term. The components of the S&P 500 Index are based primarily on their market caps, with the index representing the largest capitalization stocks in the U.S. Stocks are included in the index by a committee vote; the committee considers characteristics that include liquidity, domicile, sector and length of trading time. The index's returns are float-adjusted and market cap-weighted; stocks with greater market caps have greater impacts on the index's returns, and only the available shares traded in the market are used for calculation.
Over the long term, the S&P 500 has produced significant returns for investors who have stayed invested. In the recent bull market following the 2008 financial crisis, the S&P 500 Index reported a five-year return of 57.67% through May 27, 2016. Investors have received similar results over the last 10 years, with a return of 63.94% through May 27, 2016. For the 20-year period through May 27, 2016, the S&P 500 gained 209.31%.
Global Market Comparison
In the global markets, the return of the S&P 500 and resilience of the U.S. economy have proved to outperform most comparable country indexes over the five-, 10- and 20-year periods.
In China, the Shanghai Composite Index reports a five-year return of negative 1.29%, a 10-year return of 74.83% and a return of 140.57% since the index's inception in March 1999.
Against the broader market in Asia, the S&P 500 reports similar superior results. Compared to a broad market index measure for Asia, the Asia Dow, the S&P 500's return has outperformed stocks in Asia significantly. Since the Asia Dow's inception in October 2011, it gained 5.11% through May 27, 2016, compared to a gain of 71.4% for the S&P 500.
Equity premiums for the S&P 500 over stocks in Europe have also been occurring, but in the more recent term. Europe's FTSE 250, a representation of the largest stocks in the United Kingdom, had a five-year return of 43.71% through May 27, 2016. For the 10-year period, the FTSE 250 reports a gain of 80.97%; since the inception of the FTSE 250 in April 1999, the index reported a gain of 215.52%.
In comparison to Germany's DAX, a second leading index in Europe often relied upon for a recent representation of market movements in the eurozone, the S&P 500 has also outperformed. Since the inception of the DAX in May 2011, the index gained 41.55% through May 27, 2016.
Overall, the S&P 500 provides a leading index for investors both in the U.S. and globally who are seeking equity exposure with more diversified risk than single stock investments. While volatile over the long term, the S&P 500 has generated substantial returns for investors above and beyond the average risk-free market investments.