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Five in the 500

Jan 30, 2014 - By Steven R. Peck

It was a very good year

Many readers followed along during 2013 as we imagined making a $500 investment in something called an "index fund" based on the rise and fall each day of the Standard & Poors 500 Index.

The S&P 500, as it is known commonly, is not so well known as its more famous big brother, the Dow Jones Industrial Average, but many economists, investors and business people say it actually is a more representative slice of the American economy than the Dow Jones.

For one thing, it has 500 member businesses compared to the Dow's 30. It covers a broad spectrum of size and business emphasis, whereas the Dow's tend to be major industrial corporations and retail or service giants.

The S&P 500 certainly has some biggies, but it is a much broader sampling of American commerce then the Dow is, and shares of individual S&P stocks often trade for a lot less than the Dow companies do.

But an index fund doesn't worry about individual stocks and their share prices. In fact, if you invest in an index fund, you are not buying shares in an individual stock or stocks at all. You are simply joining other investors in predicting whether the daily index number, which is similar in methodology to the Dow Jones Industrial Average, will rise or fall.

When enough people pool their money, anything can be considered an "investment," including a simple bet on whether a stock index rises or falls.

In the days leading up to the second inauguration of President Barack Obama, there was a lot of speculation as to whether the stock market would respond favorably or negatively to Obama's second term.

So we chose Jan. 21, 2012, as the starting date for our imaginary investment. That was the day Obama took the oath of office publicly and began his second term.

The investment idea was very basic. Imagine you had $500. You invested it in an S&P 500 index fund and simply left it there for one year. If the daily index closed higher, then your money grew by the same percentage. If the S&P 500 index fell, then your nest egg shrank as well.

A couple of years earlier we had conducted a similar experiment called "Thou in the Dow," which put an imaginary $1,000 into a Dow Jones index fund. That was an up-and-down exercise, with the thousand dollars dipping to the mid-900s before rallying to post a pretty decent gain by the end of the year.

As anyone who followed Five in the 500 last year knows, there was little doubt from the start as to which way this would go. The S&P 500 experienced the greatest year in its history. It rose almost every trading day of the year. It set new records more than 30 times during the year we were monitoring it.

Now for the payoff: if you had invested $500 in a basic S&P 500 index fund on Jan. 21, 2013, and left it in place for exactly one year, by Jan. 21, 2014, it would have grown to $662.91.

That is a return on investment of nearly 33 percent in one year. In a word, spectacular.

Real investors could have pressed their advantage by adding an amount of money similar to each day's or week's or month's or quarter's growth to the original nest egg. An attentive investor following such a procedure very easily could've seen that $500 grow to $2,000 or more. And, of course, investors like that usually don't start with $500. They start with $5,000, or $10,000, or $50,000 or even more.

Not everyone has money to invest, nor the time or the patience to weather the ups and downs, but now, for the second time in our mock investment exercises, the wisdom of putting some money into a reputable investment and leaving it alone for a while has proven out.

Thanks to those who made regular inquiries or comments about Five in the 500. These things can be fun to imagine, and even more fun to experience if you're willing to take the risk. Stay tuned. We will probably launch a similar experiment before long.

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