Where to Invest $5,000 in December 2023

When I’m out of ideas on how to invest, I default to a low-cost S&P 500 Index ETF.

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Do you have $5,000 just sitting there, perhaps burning a hole in your pocket, and you’re unsure of how to put it to good use? If a holiday getaway isn’t on your agenda this December, why not consider a different kind of gift – an investment for your future self?

As we wrap up the year, you might find yourself in a similar position to mine, having explored various investment options and strategies throughout the year, and now pondering where to allocate any remaining funds.

When in doubt, I often find myself returning to a tried-and-true choice: the S&P 500 Index. This option stands out for its simplicity, reliability, and potential for steady growth. Here’s why I like it.

The S&P 500 is very hard to beat

Investing in the S&P 500 is often seen as a benchmark strategy in the world of investing, and for good reason. This index is renowned for its ‘self-cleansing’ mechanism and broad market cap-weighted strategy, making it an exceptionally effective tool for U.S. stock exposure.

One of the key strengths of the S&P 500 is its composition, which is periodically updated to include the largest and, typically, the most successful companies in the U.S. market. This self-cleansing aspect means that the index naturally adapts to include rising stars and exclude those that are declining.

As a result, it consistently captures the handful of stocks that drive the majority of market returns. This dynamic ensures that the S&P 500 remains representative of the current market landscape and continues to reflect the most successful sectors and trends.

The effectiveness of the S&P 500’s strategy is not just theoretical but is also backed by empirical evidence. According to the latest SPIVA (S&P Indices Versus Active) update, a staggering 92.2% of all U.S. large-cap funds have lagged behind their index counterparts over the last 15 years.

This data reinforces the notion that for many investors, especially those who prefer a ‘set it and forget it’ approach, investing in an S&P 500 index fund can be a more effective strategy than trying to pick individual stocks or actively managed funds.

It’s extremely cheap to track

The affordability of tracking the S&P 500 is another key advantage. Thanks to its low turnover and a strict rules-based strategy, it’s very cost-effective for ETFs to mirror this index.

This low-cost attribute is crucial for investors to consider because, just like dividends, fees also compound over time and can significantly impact long-term returns.

Taking the example of the most popular S&P 500 index ETF in Canada, BMO S&P 500 Index ETF (TSX:ZSP), we see this cost advantage in action. ZSP charges a management expense ratio of 0.09%.

For a $5,000 investment in ZSP, this translates to an annual fee of only $4.50. This low fee structure allows investors to enjoy more of their investment returns, as less is being eroded by management costs.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Tony Dong has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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