Should You Really Invest Everything In The S&P 500?

Posted in   Stocks   on  April 3, 2023 by  Money Bren0

Nothing in this article is financial advice. The writer is not your financial advisor. Investing contains risk and you can lose money. Consult your own professionals before making investment decisions. This article may contain affiliate links. 

Just buy the S&P 500! You can't lose money! It's the safest investment you can make!!

This is popular advice given in countless personal finance books, blogs, podcasts, and even by history's greatest investor Mr Warren Buffett.

Historically, not bad advice.

America is the greatest economic story in history, and investing in its 500 biggest companies has given phenomenal returns over the past 100 years.

If you had invested $100 in the index in 1929, you would have $521,000 today, a return of 9.52% per year.

As Warren Buffett often says - it rarely makes sense to bet against America.

That's great advice ... until it isn't.

Here's something I'm 99% sure of:

America won't grow like this forever.

Will the country collapse? I don't know. Maybe. Nobody knows. That's the problem. Nobody knows. It may collapse, or it may split into different nations, like the Soviet states. It might just become another "once great empire" like the United Kingdom, which at one point controlled half the world. Or it might just be reduced to a historic and insignificant city like Rome. 

If you're a student of history, this won't sound far-fetched to you. It will actually sound ... inevitable.

Every great Empire, whether it's Greece, or Egypt, or Mongolia, or Britain or Rome, falls eventually. And I don't mean "fall" as in disappear, but fall as in make way for the next great power.

Here's the kicker - nobody knows when it will happen.

It just does.

So as Buffett says - it's never a good time to bet against America ... until it is.

But Isn't The S&P 500 The Safest?

Historically over a 100 year time frame, probably.

Mostly because we don't have much data on other indexes.

But even in the last 20 years, we've seen many indexes perform strongly.

Let's take a look at a few:

Index

March 2023

March 2013

March 2003

S&P 500

4050.83

1466.47

929.01

NASDAQ 100

12013.47

3101.66

1421.32

Dow Jones

32859.03

13435.21

8773.57

NZX 50

11884.5

4084.84

1902

ASX 300

7132.9

4695.9

3070.4

Nikkei 225

28041.8

10599.01

8713.33

UK FTSE 100

7621.66

6089.84

4001.4

And here's how that translates into returns:

Index

10 year CAGR

20 year CAGR

UK FTSE 100

2.27%

3.27%

ASX 300

4.27%

4.3%

Dow Jones

9.36%

6.83%

Nikkei 225

10.22%

6.02%

S&P 500

10.69%

7.64%

NZX 50

11.27%

9.59%

NASDAQ 100

14.5%

11.26%

(CAGR means Compounded Annual Growth Rate - basically a fancy name for "return per year")

However, this is only half the picture. This only equals market price, and doesn't include dividends.

Here's the dividend data from each index over the last ten years:

As we can see - the dividends have quite a large spread between countries.

Currently the Australian index is paying 5% in dividends, and it's been as high as 8%.

However, the NASDAQ 100 has never paid more than 2%.

This is going to affect our returns substantially.

I don't have numeric data for each year, but here's a (very rough!) guesstimate of each index's average dividend yield over the last ten years:

Index

Average yield

NZX 50

3.5%

NASDAQ 100

1.5%

S&P 500

2%

ASX 300

5%

Dow Jones

2%

UK FTSE 100

5%

Nikkei 225

1.8%

And here's what the total CAGR for each index would look like if we added on our (very rough estimate!) of dividend returns:

Index

10 year CAGR

20 year CAGR

NZX 50

14.8%

13.1%

NASDAQ 100

16%

12.8%

S&P 500

12.7%

9.6%

ASX 300

9.3%

9.3%

Dow Jones

11.4%

8.8%

UK FTSE 100

7.3%

8.3%

Nikkei 225

12%

7.8%

So what does this tell us?

It tells us there's no reason (based on the last twenty years) to favour the S&P 500 heavily over other indexes.

It hasn't had the best return over the last ten years or twenty years, nor does it provide the highest yields.

Interestingly, we are always telling people to invest in the S&P 500 in New Zealand, when in fact our own index, the NZX 50, has significantly outperformed it over both a ten and twenty year period.

Even over a twenty year period it's mostly on par with the Australian ASX 300.

Instead of telling Kiwis to chase high returns on the US market, they would have been better simply investing at home!

So should I sell all my S&P 500 funds?

I still think the S&P 500 is a great place to invest your money.

However, it's not the only great place.

And has drawbacks.

For one - it only invest in US domiciled companies.

That's great while the USA is the world's strongest economy, but that can change at any time.

It also opens you up to USD risk. If the USD ever lost its reserve currency status and/or weakened considerably, you'd be exposed to a potentially large loss.

Even though it's an index fund, you are not well diversified by geography or currency, or even politically.

Should China, Russia, India, Japan, Mexico or Brazil (or any other country) emerge as an economic power, you have no exposure.

What Other Index Fund Would I Invest in?

In my course Simple Stocks, I suggest investors start with the S&P 500, but I also suggest they can build out their portfolio into a range of different index funds. 

If you want to keep things nice and easy, the most obvious fund to invest in is a world index fund.

This not only covers US stocks but also stocks from all other developed countries in the world.

Probably the most accessible of these is the TWF Smartshares Fund, which you can also invest in directly on the US market under the ticker VT.

Here's a breakdown of that fund geographically:

The fund has returned 8.2% over the last ten years, compared to 12.7% for the S&P 500, so it has underperformed substantially.

However, that is expected, as the US economy is the world's strongest - a global average would be expected to return less.

The difference is the world fund gives you the global diversification that an S&P 500 doesn't.

If you don't want to invest in a world fund, then your other option is to simply diversify into other ETFs.

There are countless ETFs to choose from, and many reasons you might or might not want to invest in them. Where you invest is going to be up to your own worldview and risk profile. 

However, to get you started, here are the the funds that will give you access to all the indexes we did comparisons to above:

Ticker

Index

Management fee

NZG (NZX)

NZX 50

0.2%

FNZ (NZX)

NZX 50

0.5%

VAS (ASX)

ASX 300

0.1%

AUS (NZX)

ASX 200

0.3%

NDQ (ASX)

Nasdaq 100

0.48%

F100 (ASX)

FTSE 100

0.45%

IJP (ASX)

MSCI Japan

0.5%

TWF (NZD)

FTSE Global Index

0.4%

All these options are funds domiciled in New Zealand or Australia, meaning they are all easily accessible from New Zealand using either Sharesies or ASB Securities.

Instead of putting 100% of your portfolio in the S&P500, it will allow you to build a portfolio that might look something like this:

What do you think?

After seeing this data, will you start to diversify out of the S&P 500?

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