The large-cap S&P 500 index still managed to reach a new all-time high on Wednesday, in the shadow of a federal government shutdown that remains unresolved. This milestone has been a complete game-changer for investors. The index has surged almost 90% since the start of this equity bull market three years ago! As of early Thursday, the S&P 500 had catapulted to another intraday high, a testament to the optimism in large-cap U.S. equities.
The S&P 500 index is a market capitalization-weighted index, designed to measure the performance of large-cap companies across all industries and sectors. The index is deeply weighted toward the technology sector. This concentration has been a key driver of its recent success. This focus has left many finance insiders deeply concerned about the wisdom and sustainability of such a concentrated, high-risk investment strategy.
Michael DeMassa, a certified financial planner and chartered financial analyst, expressed his skepticism surrounding today’s S&P 500. He’s not about to start hailing the market’s performance and future prospects. He stated, “The S&P 500 is broken.” His comments underscore a developing concern among investors to use this index as the singular basis for long-term investment plans.
Looking back, the S&P 500 has gone through violent corrections. From 2000 to 2008, the index fell by more than 30%. At the same time, between 2002 and 2009, it was hit with a streak of terrifying down years. This history should caution investors against the perils of a “set-it-and-forget-it” mentality. Ultimately, in this ever increasingly competitive marketplace, it’s more important than ever to be proactive and active.
Deva Panambur, another certified financial planner and chartered financial analyst, advocates for creating a more balanced portfolio than what the S&P 500 offers. He emphasized the importance of diversification when he said, “When I look at the overall allocation, my goal is to make sure it’s more balanced than the S&P 500.” No wonder investors love this rosy picture. They understand that small-cap stocks, value stocks, international equities and bonds have often led the way up while the S&P 500 has lagged during bear markets.
Brendan McCann, associate manager research analyst at Morningstar, proposes a better approach for homebuilders—one that investors should look for when evaluating their next investment. For this reason, he advises choosing a total market index fund rather than just investing in an S&P 500 index fund alone. Such an approach would allow for much greater exposure to other asset classes and reduce the risks of concentrated assets.
Morgan Stanley Wealth Management, in a research note on Sept. 29, congratulated investors for surviving the S&P 500’s spectacular recovery. Their warnings highlight the need to know what you’ll face if you go all-in on this particular index.