There are a lot of ways you can invest your money. You can buy gold, which has been used as a store of value since Roman soldiers were paid in it and is still hoarded by central banks today. You can buy real estate, rent it out for income, or hope it appreciates the way it did for previous generations. Or you can invest in stocks.
What people often forget is what stocks actually represent. When you buy stocks, you’re buying ownership in real businesses. Over time, those businesses sell more products and services, expand into new markets, buy back shares, and pay dividends. As earnings grow, earnings per share grow, and that growth is what ultimately drives long-term returns.
The hard part is picking the right stocks. My view is simple: why bother? Instead of trying to guess which companies will win, simply buy the stock market. You can do this globally or just in the U.S., but to keep things simple, let’s focus on one benchmark that has done the heavy lifting for decades: the S&P 500.
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What is the S&P 500?
The S&P 500 is a benchmark index made up of 500 of the largest publicly traded U.S. companies. Inclusion isn’t random. There is a rules-based component that screens for factors such as minimum market capitalization, liquidity, and earnings consistency. There is also a committee component, where changes are reviewed and approved. This adds a qualitative layer on top of the rules.
One defining feature of the S&P 500 is that it is market-cap weighted. Companies with larger market values receive larger weights. As successful companies grow, they naturally become a bigger part of the index. As struggling companies shrink, they fade into the background or are eventually removed. This creates a built-in momentum effect that requires no forecasting or stock picking on your part.
How to invest in the S&P 500
You don’t buy the S&P 500 directly. You invest through index funds, which simply buy all the same stocks in the same proportions.
For Canadian investors, one straightforward option is the BMO S&P 500 Index ETF (TSX:ZSP).
This ETF tracks the S&P 500 for a very low 0.09% expense ratio. On a $10,000 investment, that’s about $9 per year in fee drag.
Does this strategy really work?
Over the past 33 years, a $50,000 lump-sum investment in an S&P 500 index fund compounded at roughly 10.7% annually. That works out to a cumulative return of about 2,759%, turning $50,000 into roughly $1.4 million before taxes and fees.
There are important caveats. First, volatility is real. In an average year, returns have swung about 18.6% up or down. As your portfolio grows, those percentage swings translate into much larger dollar moves, which can test your risk tolerance. Seeing a few hundred dollars move in a day is easy. Watching tens of thousands move can be uncomfortable.
Second is drawdown risk. The worst peak-to-trough loss for the S&P 500 occurred during the 2008 financial crisis, when the index fell about 55%. It took roughly four years to fully recover. Investors who couldn’t stay invested during that period missed much of the eventual rebound.
If you can tolerate that volatility and stay disciplined, owning the S&P 500 through a low-cost ETF can be a powerful long-term growth strategy. If not, pairing it with bonds or cash may make the ride more manageable.
