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Most investors have heard that investing in the S&P 500 is one of the best ways to create long-term wealth. It’s probably the default option in their workplace retirement plan. Even many self-directed investors will put their money in the Vanguard S&P 500 ETF or the iShares Core S&P 500 ETF 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 an investment for most people only. That can cause some problems because it leaves a lot of inheritance categories unrepresented. Affiliates can improve growth opportunities, reduce downside risk, or create a regular income stream. Without any of that to fill it in, a high-tech focus or an index growth bias can mean a lot of volatility.
The S&P 500 is an investment for most people only. (Stock)
Important takeaways
- The S&P 500 has delivered nearly 10% annualized returns over the long term, making it a more than adequate retirement holding.
- The top 10 stocks make up about 38% of the index. That makes it concentrated and highly exposed to several technology stocks.
- Holding just the S&P 500 means you exclude small currencies, international stocks, fixed income, gold, and crypto. These asset classes offer significant diversification benefits.
- An S&P 500 ETF is sufficient as a core portfolio holding, but retirement portfolios should have more balance.
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| A ticker | Security | Finally | Change | change % |
|---|---|---|---|---|
| GSPC | NO DATA AVAILABLE | – | – |
– |
| VOO | VANGUARD S&P 500 ETF – USD DIS | 651.54 | -1.21 |
-0.19% |
| IVVV | NO DATA AVAILABLE | – | – |
– |
The case for owning only the S&P 500
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. Due to its heavy focus on “Magnificent Seven” stock, it has outperformed many genres, styles, and themes during that time.
The S&P 500 includes many of the best companies the US economy has to offer. (Spencer Platt/Getty Images)
But performance numbers aside, the S&P 500 includes many of the best companies the US economy has to offer. It owns companies such as Apple, Microsoft, Amazon, Walmart, JPMorgan Chase, ExxonMobil, Johnson & Johnson, and Visa. These companies generate billions of dollars in revenue, make huge profits, and have been around for decades. They are the pillars of the economy and will likely be around for many decades.
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These are the types of high-quality companies that would make a great portfolio.
| A ticker | Security | Finally | Change | change % |
|---|---|---|---|---|
| AAPL | Company APPLE INC. | 273.05 | +2.82 |
+1.04% |
| MSFT | MICROSOFT CORP. | 418.07 | -4.72 |
-1.12% |
| AMZN | Company AMAZON.COM INC. | 248.28 | -2.28 |
-0.91% |
| WMT | Company WALMART INC. | 127.92 | +0.42 |
+0.33% |
| JPM | JPMORGAN CHASE & CO. | 316.99 | +6,70 |
+2.16% |
| XOM | EXXON MOBIL CORP. | 147.68 | +1.23 |
+0.84% |
| JNJ | JOHNSON & JOHNSON | 230.59 | -3.60 |
-1.54% |
| V | Company VISA INC. | 313.94 | -3.08 |
-0.97% |
The case for owning more than the S&P 500
While the S&P 500 is undoubtedly a good index to invest in, it is also not perfect.
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Here’s what investors have to say about investing exclusively in the S&P 500:
- Small and mid caps: The Vanguard Total Stock Market ETF (NYSEMKT: VTI ), which invests in the entire US equity market, holds about 3,500 stocks. The 3,000 stocks not covered by the S&P 500 represent about 25% of all US equity market capitalization. Small and medium elevators have a completely different sector share and rotating exposure. Giving up means missing out on a big part of the US economy.
- International stocks: As we’ve seen over the past year, foreign stocks can do very well when US stocks die. They, too, have a different economic makeup and different sensitivities than US companies.
- Fixed income: Bonds may be boring, but they can balance portfolio risk and provide a significant portion of income. As workers approach retirement, relying more on fixed income for security and income becomes more important.
- Gold: Precious metals generally perform well during times of inflation and economic turmoil. They traditionally have a very low correlation to stocks, which makes them less risky.
- Crypto: Bitcoin and other stablecoins have become a legal asset class. Adding crypto as a small part of a broader asset allocation makes some sense.
| A ticker | Security | Finally | Change | change % |
|---|---|---|---|---|
| VTI | VANGUARD TOTAL STOCK MARKET ETF – USD DIS | 350.24 | -0.27 |
-0.08% |
Holding more than just major US stocks allows you to participate in different market cycles, helps adjust overall portfolio volatility, and can help build a portfolio that best fits your goals and risk tolerance.
Investors must own more than just the S&P 500
The S&P 500 is a valuable investment, but you need more.
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I am a big advocate of diversification and looking for ways to reduce exposure to risk. Adding different inheritance classes helps achieve this. In most cases, it’s not about trying to pick winners. Buy easily the global economy and let the long term power of integration do the work for you.
JPMorgan Chase is the advertising partner of Motley Fool Money. David Dierking has positions in Apple and the Vanguard Total Stock Market ETF. The Motley Fool has positions and recommends Amazon, Apple, JPMorgan Chase, Microsoft, Vanguard S&P 500 ETF, Vanguard Total Stock Market ETF, Visa, and Walmart and is short Apple shares. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a policy of disclosure.
