You'll often hear that it's important to diversify your holdings in your brokerage account. If you only invest in a single industry, you'll risk major losses in a situation where that sector alone is negatively impacted.
Take someone who focused their investing strategy on travel stocks in early 2020. Travel stocks took a huge hit that year due to pandemic-related shutdowns, which means anyone with most of their portfolio in travel stocks would've been looking at serious losses.
Now, there are different ways you can go about diversifying your portfolio. You could simply buy stocks across a range of market sectors. Or, you could load up on S&P 500 ETFs.
ETFs, or exchange-traded funds, trade publicly and consist of numerous stocks. You can buy sector-specific ETFs -- for example, travel ETFs. Or, you could buy S&P 500 ETFs.
The S&P 500 index consists of the 500 largest publicly traded companies today. The index is usually indicative of the stock market's performance as a whole. So when you buy S&P 500 ETFs, you're effectively putting your money into the broad market. You're also getting instant diversification.
Investing in S&P 500 ETFs can be a great strategy, especially if you're not so confident about choosing stocks individually. But should you only invest in S&P 500 ETFs?
The one time it's okay to choose a single investment
You wouldn't ever want to load up your portfolio with a single stock. But if you're buying S&P 500 ETFs, this is the one scenario where you might get away with only owning a single investment. That's because your investment gives you access to the broad stock market.
Meanwhile, if you only invest in S&P 500 ETFs, you won't beat the broad market. Rather, you can expect your portfolio's performance to be in line with that of the broad market. But that's not necessarily a bad thing.
See, over the past 50 years, the S&P 500 has delivered an average annual 10% return. That average accounts for years of strong performance as well as downturns.
A 10% return is a pretty good one. For context, a $6,000 investment that enjoys a 10% annual return over 40 years will grow into almost $272,000. So if you're happy with a portfolio that performs comparably to the stock market as a whole, then sticking to S&P 500 ETFs alone isn't a bad idea.
However, if you assemble a portfolio of individual stocks that perform better, you might enjoy a 12% or 15% return over time -- or more. A $6,000 investment that earns 15% a year over 40 years will grow into $1.6 million.
How much effort do you want to put in?
Putting your money into S&P 500 ETFs only might limit your returns to some degree. But in exchange, you'll have a lot less work on your hands. You won't have to research individual stocks for your portfolio and keep tabs on their performance quarter after quarter.
If you don't want to put a lot of effort into managing your investments, then S&P 500 ETFs are a good solution. But if you're willing to do the work, then you might do even better in the long run with a portfolio of hand-picked stocks (although, the odds are against you).
Another idea? Do both. Keep some of your portfolio in the S&P 500 but also add stocks you think offer exceptional value. With any luck, you'll enjoy solid returns as a result of a modest amount of research, but not an overwhelming amount.
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FAQs
Meanwhile, if you only invest in S&P 500 ETFs, you won't beat the broad market. Rather, you can expect your portfolio's performance to be in line with that of the broad market. But that's not necessarily a bad thing. See, over the past 50 years, the S&P 500 has delivered an average annual 10% return.
Is it okay to only invest in S&P 500? ›
Investing in an S&P 500 fund can instantly diversify your portfolio and is generally considered less risky. S&P 500 index funds or ETFs will track the performance of the S&P 500, which means when the S&P 500 does well, your investment will, too. (The opposite is also true, of course.)
Is it smart to only invest in ETFs? ›
ETFs make a great pick for many investors who are starting out as well as for those who simply don't want to do all the legwork required to own individual stocks. Though it's possible to find the big winners among individual stocks, you have strong odds of doing well consistently with ETFs.
What if I invested $1000 in S&P 500 10 years ago? ›
According to our calculations, a $1000 investment made in February 2014 would be worth $5,971.20, or a gain of 497.12%, as of February 5, 2024, and this return excludes dividends but includes price increases. Compare this to the S&P 500's rally of 178.17% and gold's return of 55.50% over the same time frame.
Is S&P 500 ETF a good investment? ›
The Vanguard S&P 500 ETF (VOO 1.26%) is a top choice for most index fund investors. Even Warren Buffett recommends it above any other investment. There's a good reason for that. Its low expense ratio and tight index tracking make it a top choice for anyone looking to match the returns of the S&P 500.
How much would $1000 invested in the S&P 500 in 1980 be worth today? ›
In 1980, had you invested a mere $1,000 in what went on to become the top-performing stock of S&P 500, then you would be sitting on a cool $1.2 million today.
How much would $10,000 invest in the S&P 500? ›
Assuming an average annual return rate of about 10% (a typical historical average), a $10,000 investment in the S&P 500 could potentially grow to approximately $25,937 over 10 years.
Why is ETF not a good investment? ›
ETFs are subject to market fluctuation and the risks of their underlying investments. ETFs are subject to management fees and other expenses. Unlike mutual funds, ETF shares are bought and sold at market price, which may be higher or lower than their NAV, and are not individually redeemed from the fund.
Is it OK to only invest in ETFs? ›
An index ETF-only portfolio can be a straightforward yet flexible investment solution. There are plenty of advantages in using exchange-traded funds (ETFs) to fill gaps in an investment portfolio, and lots of investors mix and match ETFs with mutual funds and individual stocks and bonds in their accounts.
Why I don't invest in ETFs? ›
ETFs are most often linked to a benchmarking index, meaning that they are often not designed to outperform that index. Investors looking for this type of outperformance (which also, of course, carries added risks) should perhaps look to other opportunities.
As you will see, the future value of $1,000 over 20 years can range from $1,485.95 to $190,049.64.
| Discount Rate | Present Value | Future Value |
|---|
| 6% | $1,000 | $3,207.14 |
| 7% | $1,000 | $3,869.68 |
| 8% | $1,000 | $4,660.96 |
| 9% | $1,000 | $5,604.41 |
25 more rowsMeaning my $10,000 investment would now be worth $15,900. Now, if I'd bought into the pioneering EV producer five years ago, and held them through the 2022 retrace and the 2023 rebound, I would have seen those Tesla shares gain a stellar 756%. That would see my $10,000 investment balloon into $85,600.
How much is $10,000 invested in the S&P 500 in 1980? ›
Think about this: If you invested $10,000 in the S&P 500 at the start of 1980 and left the money untouched until 2022, you'd have accumulated nearly $1.1 million by the end of last year, according to the Hartford Funds. The S&P 500 has an annualized total return of more than 12% over the last decade.
How many S&P 500 ETFs should I own? ›
SPY, VOO and IVV are among the most popular S&P 500 ETFs. These three S&P 500 ETFs are quite similar, but may sometimes diverge in terms of costs or daily returns. Investors generally only need one S&P 500 ETF.
Should I buy Voo or SPY? ›
If you are a cost-conscious investor, the VOO, IVV, and SPLG might make a more attractive option compared to SPY with their lower expense ratios. Conversely, you might appreciate the higher liquidity of SPY if you're an active or institutional trader. Ultimately, VOO, SPY, IVV, and SPLG are all great options.
What ETF is better than the S&P 500? ›
Focusing on growth businesses. In the trailing five-, 10-, 15-, and 20-year periods, the Vanguard Growth ETF (VUG 0.74%) has outperformed the S&P 500. That is a remarkable track record.
Can you live off the S&P 500? ›
Once you have $1 million in assets, you can look seriously at living entirely off the returns of a portfolio. After all, the S&P 500 alone averages 10% returns per year. Setting aside taxes and down-year investment portfolio management, a $1 million index fund could provide $100,000 annually.
Is it better to invest in S&P 500 or Total market? ›
For investors with small-cap exposure elsewhere in their portfolios, the large- and mid-cap S&P 500 fund may suffice. But for a broader, one-stop-shopping fund, the total market index offers maximum diversification within the U.S. equity universe.
Is it okay to only invest in index funds? ›
If you're new to investing, you can absolutely start off by buying index funds alone as you learn more about how to choose the right stocks. But as your knowledge grows, you may want to branch out and add different companies to your portfolio that you feel align well with your personal risk tolerance and goals.
What is the disadvantage of S&P 500? ›
The main drawback to the S&P 500 is that the index gives higher weights to companies with more market capitalization. The stock prices for Apple and Microsoft have a much greater influence on the index than a company with a lower market cap.
