Key insights
- The article discusses the common strategy of using S&P 500 ETFs for retirement investing, highlighting potential drawbacks. It argues that relying solely on the S&P 500 lacks diversification across asset classes, sectors, and geographies, potentially increasing volatility and missing growth opportunities. While acknowledging the index's strong performance and high-quality companies, it suggests a more diversified approach for long-term financial security. This has a slightly negative influence as it suggests potential risks in a popular investment strategy.
Most investors have heard that investing in the S&P 500 (^GSPC 0.35%) is one of the best ways to create long-term wealth. It's probably the default option in their workplace retirement plan. Even a lot of self-directed investors will put their money in the Vanguard S&P 500 ETF (VOO 0.34%) or the iShares Core S&P 500 ETF (IVV 0.34%) and call it a day. There's a reason, after all, that these are the two largest ETFs in the world, with more than $1.6 trillion in assets combined.
The S&P 500 is many people's only investment. That can create some problems because it leaves a whole slew of asset classes unrepresented. Including them can enhance growth opportunities, mitigate downside risk, or create a regular income stream. Without any of that to complement it, the high tech concentration or the growth tilt of the index could mean too much volatility.
It would be easy to look at the returns of the S&P 500 over the past 10 to 15 years and come to the conclusion that it's the only investment you need. Thanks to its heavy concentration in the "Magnificent Seven" stocks, it has outperformed most sectors, styles, and themes over that time.
But setting aside the performance numbers, the S&P 500 includes many of the best companies the U.S. economy has to offer. It owns companies such as Apple, Microsoft, Amazon, Walmart, JPMorgan Chase, ExxonMobil, Johnson & Johnson, and Visa. These companies produce billions of dollars in cash flow, generate huge revenues, and have been around for decades. They're the cornerstones of the economy and will likely be around for many more decades.
These are exactly the kinds of high-quality companies that can make a great portfolio.
While the S&P 500 is unquestionably a great index to invest in, it's also incomplete.
Here's what investors are missing out on by investing only in the S&P 500:
Holding more than just U.S. large-cap stocks lets you participate in different market cycles, helps smooth out overall portfolio volatility, and can help build a portfolio more suited to your goals and risk tolerance.
The S&P 500 is a great core investment, but you need more.
I'm a big advocate of diversification and looking for ways to mitigate risk exposure. Adding different asset classes helps accomplish this. In most cases, it's not about trying to pick winners. Simply buy the global economy and let the long-term power of compounding do the work for you.