When anyone looks at the long-term prices of S&P 500, it seems pretty obvious what the future will bring. There’s a clear explanation for this consistent growth, but so many traders don’t consider it. Let’s dive into the S&P 500 and see if it’s right for you.
The S&P 500 is a tradable instrument that consists of the top 500 companies in the US. Many of the companies in the index are known worldwide. The underlying success of each of these massive companies is aggregated into the index and drives the overall price.
Over the last three decades, the S&P 500 has shown an average annual growth of 10.7%, and when the compound effect is factored in, it makes for very attractive returns for those early investors. But is it too late to trade S&P 500? And why choose S&P 500 in 2021?
“In my view, for most people, the best thing to do is own the S&P 500 index fund,” Warren Buffett.
Every experienced trader knows that diversification is a primary strategy for risk management. Don’t put all your eggs in one basket. But in the case of the S&P 500, the asset itself is already a diversification. Its price is influenced by 500 companies, making it incredibly secure. There are, realistically, only two ways the S&P 500 can crash.
While the first possibility is very unlikely, the second option – as we have learnt many times – could happen.
Economies tend to keep inflating until a corrective burst of the bubble splashes panic all over the globe. Having said that, looking at the S&P chart, the recession of the late 2000s caused a dip in the price, but the rally that followed was like nothing the financial world had ever seen.
Big companies tend to get bigger until they become obsolete. Hardly a technical approach to forecasting, but we’ve seen it happen for decades. Huge, successful companies get bigger and swallow up the competition. Now let’s consider which companies comprise the elite 500 list.
Apple, Amazon, Facebook, Netflix, and Alphabet, to name just a few. We’ve seen how they perform as individual assets, so it’s hardly surprising that aggregated they are rising. It’s the nature of the index. Only the most successful companies can join the prestigious club.
Those companies not pulling their weight are replaced by new or rising brands, so the nature of the index is a group of elite brands that are holding market share in their industry. So, what can you expect from such an index?
So does the S&P 500 need technical analysis? Yes. Every investment entry point should be accompanied by technical and fundamental analysis, even when it seems obvious.
There are other factors to consider when investing in an index. If you are a daytrader, then you should be aware that S&P 500 tends to have a rather aggressive breaking cycle every month, and it’s hard to predict. If you go long with high leverage prior to the correction, you may see your equity vanish in a single day.
If you have sizable equity, moderate leverage, and you’re willing to wait months or even years, the S&P 500 might be for you. Has the monthly fall already occurred? Check the charts and make your own analysis. Your timing might just be perfect.