Index Investing: SP500 and SPY

Perhaps you have heard of the idea that you should just buy the whole (U.S.) Market and stop trying to pick winners and losers.  That's what Buffett (former CEO of Berkshire Hathaway), Blankfein (former CEO of Goldman) and JL Collins (author of The Simple Path to Wealth) among many many others suggest.  If you had invested in SPY in 1993, you would today have 28X as many dollars as you had invested.  Of course inflation has taken quite a toll during that time, but even after inflation, you would have 12X as much buying power with your SPY shares today as you needed to invest in them in 1993.  

The figure above gives quite a lot of information about the performance of the US stock market as a whole over the last 33 years.  To get this information we are looking at an ETF called SPY.  SPY is a "company" whose assets consist nearly entirely of shares of stock in S&P 500 companies.  In fact, SPY currently owns 1.2% of all the shares of each of the 500 stocks in the S&P 500.  1.2% of Google.  1.2% of Apple.  1.2% of Tesla.  1.2% of ... 497 other companies that are in the index.  As constituted, SPY is a great proxy for its stockholders to own a stock that behaves nearly like the entire US economy.  

The top line is the adjusted price of one share of SPY.  Two adjustments are made to the price.

1)    Many of the S&P 500 stocks pay dividends which means SPY is constantly receiving cash dividends from the stock that it owns.  Normally SPY passes this cash out by paying a dividend on the SPY shares.  The first adjustment made is to find the price the stock would have if it reinvested all dividends as they are paid out.  This gives an adjusted share price that accounts for all the earnings on all the shares owned, both the earnings that were retained by the companies and reinvested, and the earnings that were sent to shareholders as dividends.
2)    The US Dollar goes down in value a little bit every month.  This is why a shirt that might have cost you $23 in 1993 will now cost you about 57$.  So to adjust for inflation we re-state all prices in "May 2026" dollars.  So a SPY share that might have cost you $23 "January 1993" dollars in January of 1993 will be shown on our chart above as costing $57 "May 2026" dollars.  In this way, we are able to compare "apples to apples" or "prices to prices" across many decades.  

So with those adjustments in mind we see that the (adjusted) price of a share of  SPY has risen a factor of 12X from 1993 until 2025.  Whatever you could have bought instead of a share of SPY back in 1993, you can buy 12 of them, today if you cash out of your SPY position.  And that's what makes SPY attractive for retirement savings.  Stock is like a bank account that can grow your money by large multiples over the decades.  

The general trend of SPY shares being worth more and more over time can be quantified by fitting an exponential curve to the SPY adjusted share prices and noticing that on this plot it slopes steadily upwards at a rate of 6.2% Compound Annual Growth Rate or CAGR.  So, on average, every year you hold your SPY shares, they increase in actual purchasing power by 6.2%.  

However, while the "trend" is up 6.2% each and every year, the actual stock price varies much more than that and so in real life, we see the stock going up by more than that for a few years at a time, and going down in value for a year at a time, sometimes more.