Should I Just Own the S&P 500 Index?

Our topic on this episode of the Ready for Retirement podcast is about understanding if you should only own the S&P 500 Index in your portfolio.

Questions to ask ourselves: Does the S&P 500 Index give proper diversification for my individual goals? Should I be allocated to stocks outside of the United States? Does the S&P 500 Index fit my risk tolerance? Should I hold the S&P 500 Index in both my taxable and non-taxable accounts?

Are you ready to start focusing on the things that truly matter when it comes to your financial future?

Key Points

• Should I just own the S&P 500 Index?
  • Statistics
    • Investing To Outperform The Market
      • Since 2000, Dimensional Fund Advisors found that of all the stock funds that were actively managed, ~ 41% stayed in business and ~ 59% are no longer in business. Only 17% of the funds that stayed in business outperformed the benchmark.  
      • The funds that did outperform don’t have long track records that help forecast performance over the next 3, 5 or 10 years.
    • Actively Managed Funds
      • If there was data that showed that a fund could consistently outperform the market, it would be worth paying the fee.
      • History has shown that not only is paying the active management fee not worth it, but that the fund often underperforms the index.
      • Actively managed funds have higher fees and expenses which contribute to consistent underperformance.
    • Hedge Funds.
      • Hedge funds often outperform the market, but charging 2% of assets under management & 20% of profits makes it difficult to beat an index after all fees are taken into consideration.
    • S&P 500 Index Performance
      • The S&P 500 Index has had a total return of 267% over the past decade with an average return of ~13% per year.
      • If the S&P 500 Index were to return this every year consistently, you would be in a great spot to capture the performance and reach your financial goals.
      • Example: If you put $1,000,000 into the S&P 500 Index 10 years ago and didn’t contribute, it would be worth ~ $2,600,000. 
        • The historical average of the S&P 500 is ~10%, although the past decade was ~13%.
      • If over the past 10 years the S&P 500 Index received 10% per year on average, why wouldn’t we just own that?
        • The reason is that just because the S&P 500 Index performed well in the past decade, it doesn’t mean it will do so going forward.
        • In fact, if you look at the S&P 500 Index ten years prior, from 2000-2010, the S&P 500 did incredibly poorly. 
        • If you invested $1,000,000 in 2000 and looked at your portfolio in 2010, your $1,000,000 was now worth $910,000.
        • That is a loss of 9% over the course of the decade, all while inflation was increasing. 
      • Should I Be Market Timing?
        • If you tried to time the market and guess when the S&P 500 index would be either up or down, you would be attempting to actively manage your portfolio, which on average, underperforms the index.
      • How Can I Ensure I’m Well Diversified?
        • If you invested in the S&P 500 Index from 2000 to 2010, you experienced significant poor performance, of -1.3% per year.
        • However, if you also owned international investments, emerging markets, value markets, real estate, bonds, and diversified throughout, you did much better than if you had invested solely in the S&P 500 Index.
      • Diversification of S&P 500 Index
        • The S&P 500 Index tracks the 505 largest companies in the United States. 
          • You are diversified within the United States, but without emerging markets, real estate & bonds, and so many others, you’re missing proper diversification.
    • Where Does The S&P 500 Index Fit In My Portfolio?
      • The S&P 500 Index is great and should be a large piece of your portfolio, but depending on your goals, including other asset classes such as real estate, emerging markets, international funds, bonds, etc. will help give your portfolio proper diversification.
        • If you’re a growth investor in the beginning of your career, you may want the S&P 500 Index in your portfolio, but allocated to a different degree than another investor who is heading into retirement.
    •  Overview
      • Owning the S&P 500 Index is an important part of your portfolio, but owning other asset classes such as real estate, emerging markets, bonds, international funds, etc. can add additional performance through proper diversification.
      • An investor with 50+ years to retirement should be allocated to the S&P 500 Index differently than an individual hoping to retire soon.

Timestamps

1:00 – Fundamentals Of Building A Portfolio

2:30 – Should I Try To Beat The Market?

3:29 – Should I Just Own The S&P 500 Index And No Others?

4:00 – S&P 500 Index Performance

5:27 – Example of Investing $1,000,000

7:41 – How To Properly Diversify And Invest In The S&P 500 Index

9:30 – Align Your Financial Goals With Your Portfolio

11:00 – Overview Of Investing In The S&P 500 Index

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