S&P 500 Question

[Koolau]

An S&P 500 index fund is what I would choose for long term investing but there is no guarantee that it will be better than bonds or money market for every 10 year period. We are at or near all time highs right now which could mean a big drawback at some point. It could be barely even after 10 years or it could be up 100%+ in 10 years. None of us knows, even people who say they know do not know. I put the majority in a S&P 500 index and put the rest in a money market. When stocks are up I withdraw from them, when stocks are down I withdraw from cash(money market).

Agree with all you've said but I want even more diversity, so have bond fund, ex-USA fund, Emerging, a managed fund (Wellesley) and 3 MYGAs, Guaranteed Income Fund, plus PMs, etc. etc. I like diversity over just about any other factor in my AA - BUT S&P 500 is a big part of my portfolio.

 

[TickTock]

You can do a lot worse than the S&P 500. IMO, you can do a little bit better with a total USA stock market index fund. But,we are splitting hairs. Just keep the fund fees as low as possible. And be long term, of course.

+1. For ultimate capture the market simplicity, use an all-world fund like VTWAX. [Not what we do - we have US total, developed markets total, emerging markets, and REIT along with FI (individual bonds). This is under the theory that rebalancing those sectors has a reasonable chance of increasing the portfolio's return while also damping volatility. We used to have a small tilt and value tilt, but removed that as we approached FIRE.]

Low fees, long term, diversification. Also be aware that bonds/FI dampen the volatility and allow for rebalancing when one or the other tanks. [Sure, both equities and FI tanked in 2022, but there are no guarantees, only probabilities and correlations.]

 

[JohnnyBGoode]

What I like about the S&P 500, other than the other attributes stated above, is that it is self-cleaning. Each year, 20-25 stocks are added to the S&P 500 (because they are on their way "up"), and a corresponding number of stocks are removed (because they are on their way "down"). If I were holding those same stocks individually, I'd have to decide when to add and remove them and I'm sure I'd mess it up.

Apparently, nearly a third of the stocks have been replaced since 2015.

 

[WhenIsItTime]

OP is hanging on tight to this thread.

 

[F.I.R.E User]

I thought the total stock market gives a bigger return than SP 500?

 

[TheWizard]

I thought the total stock market gives a bigger return than SP 500?

Not necessarily...

 

[F.I.R.E User]

Not necessarily...

Total has more companies right?

 

[CRLLS]

I thought the total stock market gives a bigger return than SP 500?

Just like any other fund or index, one might outperform another for a while. One never knows which is the golden child at any given time, only in retrospect. My belief is that many, if not most companies in the SP500 are already international businesses. As such, I treat the SP500 as a total market investment.

 

[rmcelwee]

I'm a huge believer in investing in the S&P500. We always say "If the S&P is down 10 years from now we have a lot more to worry about than money". Because of this, we do quite a bit of investing in UPRO (and other 2x or 3X S&P investments). 1Y returns as today - UPRO 56.51% vs S&P 21.53%

Yes, I know that it is for short term investing, it won't actually do 3X, and dividends aren't exactly included. I know that but choose to invest in it anyway and have made a ton of money with it. Long term goal is to be in SPY 100% but I can't sell it all right now and take the tax hit.

 

[rmcelwee]

most companies in the SP500 are already international businesses

Smart! I agree and because of this I never tell people to buy an international fund. You are already doing some of that with the S&P.

 

[Time2]

What is your definition of "best"?

The one that makes me the most money by the year 2044!
Put answer here __________.
Crystal Ball Model # _________, Serial # ___________

 

[erkevin]

VTI (total US market) and SPY track very similarly, with SPY having a slight edge over the past 10 years.

 

[audreyh1]

Total has more companies right?

Yes, it has more companies and has exposure to medium and small companies as well as large. However it is still dominated by large companies.

 

[erkevin]

VTI has 3702 holdings.

 

[all4j]

Total & sp500 both will have about 30% +/- in the same top ten holdings, depending upon performance, et al. They may adjust companies at different times. Recency bias skews toward mega cap growth & thus a few companies drive most of the result

 

[OldShooter]

VTI has 3702 holdings.

The total US market is very highly correlated to the S&P. As a practical matter IMO, they can be viewed as being the same. Nevertheless, I like buying the whole market. Maybe its an OCD thing.

... My belief is that many, if not most companies in the SP500 are already international businesses. As such, I treat the SP500 as a total market investment.

I hear this argument a lot and don't believe it. Let me turn it on its head and see what you think:

Consider non-US companies like Fujitsu, VW, AB InBev, BP, Shell, Nestle, Siemens, Sony, Seven & I Holdings (7-Eleven), Toyota, etc. ... These are all big ones with significant presence in the US market. Would you consider a portfolio made of companies like this to be the equivalent of a broad US market portfolio? I don't think so. For the same reason I don't think a portfolio of US companies doing overseas business is a broad international portfolio. It's a big world out there and we in the US are not as dominant as we tend to think.

 

[Koolau]

The total US market is very highly correlated to the S&P. As a practical matter IMO, they can be viewed as being the same. Nevertheless, I like buying the whole market. Maybe its an OCD thing.

OCD is probably a good thing when it comes to investing. I also have a chunk of VG VFWPX (Vanguard FTSE All-Wld ex-US Idx Ins Plus). I want as much diversity as I can get. Ask me in another 10 years if it was a good idea or not.

 

[TickTock]

My belief is that many, if not most companies in the SP500 are already international businesses. As such, I treat the SP500 as a total market investment.

Jack Bogle of Vanguard espoused this view. And I think it was a blind spot in an otherwise brilliant understanding of investing.

OldShooter gave a good intuitive counter argument a few posts back. I'd like to offer math-y counter argument as well.

TL; DR - adding less than perfectly asset classes to a portfolio and rebalancing dampens volatility and of can increase the average return of a portfolio. US has out-performed for the last 15 years or so. What the next 15 years will bring is unkown.

Modern Portfolio Theory's (MPT) central premise is that adding less than perfectly correlated asset classes and rebalancing dampens the volatility of and often increases the overall return of the portfolio vs. the average return of the individual asset classes. IOW, you have to look at how the portfolio behaves as a whole rather than how each asset class behaves individually.

The below Morningstar report has a wealth of information on diversification, unfortunately only going back 18 years. It's really wonky, but look at the graph on page 26 of correlation coefficient of US Total vs. Developed and Emerging Markets:

https://assets.contentstack.io/v3/a...27b0203f76/2023-Diversification-Landscape.pdf

US vs. Dev Mkts ranges from ~0.73 - 0.90, for US vs. Emrg Mkts ~0.48 - 0.88. Looking at this time range, Morningstar concludes that long-term correlations are rising and "this time it's different" - the four most costly words in investing.

Looking at a longer time period (1971 - 2024) for US and Total World Index [so not an apples-to-apples comparison to the Morningstar report, but I couldn't find US vs. Dev Mkts online with a longer range and I'm away from my investing books - see for example Malkiel's A Random Walk Down Wall Street that does have that data], the correlation is as low as -0.32 as late as 1/93, although it hovers close to 1.00 for most of 10/95 onwards. Not always though, 0.64 in 4/15 and 0.78 in 11/18. And you would expect higher correlations, as World includes USA.

https://www.longtermtrends.net/msci-usa-vs-the-world/

The bottom chart shows correlation. The top chart shows which performed better since 1971. Since ~2008 the US has out-performed World. What will the next 15 years bring? My crystal ball is broken.

I want a portfolio that will do 'well' under a 'wide variety' of market conditions. Thus, I have US Total, Dev Mkts, Emrg Mkts, US REITS, and FI (individual bonds) in the portfolio.