Investing in the S&P 500: A Winning Strategy?
In 2007, Warren Buffett famously wagered $1 million that he could outperform hedge fund managers over a decade by investing in an S&P 500 index fund. He won the bet in 2017, and many individual investors are following in his footsteps. The S&P 500 index, comprising 500 large U.S. companies, has been a stalwart performer, with its market cap-weighted structure and quarterly rebalancing.
The three largest ETFs tracking the S&P 500 index are the SPDR S&P 500 ETF Trust (SPY), iShares Core S&P 500 ETF (IVV), and Vanguard S&P 500 ETF (VOO). Together, they account for nearly 17% of the U.S. ETF market. In 2024, VOO has attracted the most new money, with $71 billion in net inflows over the first nine months.
The S&P 500 index has continued to break records, rising around 20% year-to-date and 33% over the past 12 months. Experts attribute this performance to a stronger U.S. economy than anticipated. However, some predict a soft landing for the economy and more muted stock performance ahead.
Investing in the S&P 500 index has its advantages, including low costs, broad diversification, and long-term performance. It can be a set-it-and-forget-it strategy, allowing investors to avoid market timing. However, it also comes with concentration risks, particularly in the technology sector, which comprises 31.7% of the index.
To mitigate these risks, investors may consider diversifying their portfolios with international, small- and mid-cap companies, and real estate investments. Alternatively, they can opt for a total market portfolio like the Vanguard Total Stock Market ETF (VTI) or a small value ETF, which can provide broader exposure and less concentration at the top of the portfolio.
Ultimately, investing in the S&P 500 index can be a winning strategy, but it’s essential to be aware of the potential risks and consider a diversified approach to achieve long-term success.
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