Today we are recommending SPY to one of our clients. Before we begin to analyze this opportunity, we should understand what we are about to put our money into.
Spider is an ETF (Exchange-traded Fund) that mimics the movement of the S&P 500 index and is traded under the symbol SPY. It can also be obtained by any licensed series 6 stock broker.
Now let's take a look at SPY's performance since its initial public offering (NYSEARCA:IPO) in 1993. SPY has managed to hold a solid 0.83% average return while maintaining a 95% range of -7.60% and 9.25%. This means that 95% of the time the return will stay within that range from the average return.
To put this into perspective, we will create a scenario to analyze. Assume our client wants to invest $500 at the beginning of every month for 30 years (360 months). In a perfect world, we will assume our stock has a normal distribution and stays within the same specifications as stated above. The following graph depicts what will happen in the lower 95%, average, and upper 95% range.
Note that these figures assume the interest rate is a constant.
After evaluating the SPY, it is still considered a good buy as the average return is 0.83%. This will give you a decent and steady return in the long run. Since it is an ETF based on the S&P 500 it has a solid foundation that is "unlikely" to create a loss in one's investment over time.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.