Is it worth investing only in the S&P 500?

Sure, index S&P 500 gives you a slice of some of the biggest and most successful companies in the U.S., but let’s not forget that every investment comes with its own set of challenges and risks. In this blog, we’re diving into what makes the S&P 500 so special, its pros and cons, and what history can teach us about making smarter, more informed investment choices.

The S&P 500 is like a rockstar of the American market, grabbing attention from investors all over the world. Even if you're not really into finance, you've probably heard of it at some point. Although it's not the oldest equity index, it gained its popularity thanks to globalization and the increasing accessibility of investments from around the globe in the modern world.

Its main advantage is that it includes the 500 largest American companies by market value. This means that if you invest in the S&P 500, you already have some basic diversification - there are tech giants, pharmaceutical companies, financial institutions and much more.

What makes it special is its adaptability. It constantly monitors the top 500, so if a company falls below the line, it is immediately replaced by another that meets the criteria. This automation is great for investors because it allows you to "catch" new success stories without putting in any extra work

The best example of this is NVIDIA, which has exploded in recent years and pulled the index up. So, investing in the S&P 500 means that you are automatically part of the success of the biggest players.

But is it enough to invest only in the S&P 500?

Unfortunately, the answer is NO.

Why, you may ask!? Well, while this is definitely a smarter option than picking individual stocks, because you spread out your investment, it does have one problem – concentration risk. In other words, we put our entire bet on America.

Also, the S&P 500 is not as diverse as many people think. Although it covers 11 sectors of the economy, it is largely geared towards certain industries — especially tech. Today, tech giants like Apple, Nvidia, Microsoft and Google (a.k.a 'Magnificent 7') make up a huge share of the index. This means that if tech companies go up, so does the index, but if the sector faces troubles, the whole index suffers.

In a nutshell, the S&P 500 is a great place to start, but you shouldn't rely on it alone. Broad diversification is the key to long-term stability and security.

Power Shifts Throughout History

Over the past 15 years, US stocks, led by the S&P 500 index, have been one of the undisputed leaders in global capital markets, especially after the Great Financial Crisis of 2008. The US market saw the best recovery from the crisis out of anyone in the world and has achieved results that have absolutely outperformed the competition.

But if we look deeper into history, it becomes clear that this dominance is not the rule, but rather the exception in the long-term picture. Historical data shows that the leading positions have alternated between America and the rest of the world.

This is clearly displayed in the chart below, which shows the difference in returns between the US S&P 500 index and the global MSCI World ex-US index. When the line on the chart is above zero, it means that US stocks have outperformed international stocks, while values below zero indicate that global markets have outperformed US stocks.

Source: Morningstar, Bloomberg, and Hartford Funds

Historical examples of shifts in dominance:

• 1970s: International markets, especially European and Japanese stocks, boomed due to industrialization and strong economic growth, while America was hit by stagflation and energy crises.
• 1980s: The US market took over, led by President Ronald Reagan's reforms, deregulation, and a booming financial sector.
• 1990s: This period is known as the "dotcom" era, when American technology companies such as Microsoft and Amazon became global leaders.
• 2000s: After the dot-com bubble burst, international markets, especially emerging markets such as China, India, and Brazil, experienced exceptional growth, while America performed exceptionally poorly.

The period from 2008 onwards

Since the global financial crisis of 2008, US stocks have been experiencing almost uninterrupted growth, which is no coincidence. Low interest rates have encouraged investment, and technology companies such as Apple, Google and Tesla have built dominant positions in the global market. When we add NVIDIA, which has exploded in success in recent years, the US dominance becomes even more impressive.

But let’s not forget it wasn’t always smooth sailing. The S&P 500 took a massive hit during the crisis. Between October 9, 2007, and March 9, 2009, it plummeted by a staggering 56.8 %. This decline caused a domino effect in other markets, which many of us have felt firsthand.

Nevertheless, the US market has shown exceptional resilience and adaptability. A pragmatic capitalist approach has enabled it to recover quickly and transform into a global leader. From 2009 to 2024, the S&P 500’s average annual return reached a solid 14.47 %, significantly outperforming its historical average and confirming its strength.

At the same time, international markets have faced challenges. The European economy is characterized by a certain inertia, further burdened by political uncertainties and complex bureaucratic systems that often make it difficult to start a business.

For example, while in America you can start a business relatively easily, in Europe you are often greeted by an avalanche of regulations and high start-up costs that hinder innovation and the speed of return on investment.

The Chinese economy has also slowed down, which has further complicated the situation in global markets.

Past Performance Does Not Guarantee Returns in the Future...

Although American companies have been global leaders for the past 15 years or so, history reminds us of one important fact – the balance of power in the markets often shifts.

This is precisely what provides a key lesson for every investor: diversification is essential if you want to reduce risk and take advantage of the opportunities offered by different markets over time. Because, let’s be honest, no one can guarantee that America will remain dominant in the next 10 or 20 years.

Just think back to the period from the 1990s to the early 2000s. Back then, everyone believed the same thing that many believe today: “Just give me the S&P 500, I don’t need anything else.” However, imagine if you had decided to invest everything in that index right then. What would have happened?

From 2001 to 2010, your return would have been a big zero. So, you had invested your effort and time (even a whole decade) and in the end you had nothing to show for it. Pretty disappointing, right?

On the other hand, if you had invested in emerging markets during that same period, you could have increased your investment by almost 4.5 times!

That’s the true power of diversification – it allows you to be exposed to opportunities where the winners are, regardless of whether the balance of power shifts. Sometimes this will bring more growth, sometimes a little less, but in the long run it’s a strategy that has always brought investors the best results.

Source: Standrad & Poor, Barclay's capital, Google France, Dow Jones – Money Simplified (Petter Malouk)

S&P 500 as part of a balanced portfolio

The S&P 500 is a strong investment choice for many, but it shouldn't be the only choice. The reason lies in the importance of diversification - spreading your investments across different asset classes and geographic regions to reduce risk and at the same time, as we have shown in this blog, always be among the winners.

Instead of asking, "Why don't I just invest in the S&P 500?" consider reframing the question, "How can I build a diversified portfolio that aligns with my goals?"

By integrating the S&P 500 into a broader investment strategy, you can take advantage of its strengths – such as the high growth potential and stability of America's largest companies – while balancing risks by adding other forms of investment. For example, bonds, stocks of small companies or even international markets can significantly contribute to the resistance of your portfolio to unpredictable market changes.

Through our solutions, we offer you the opportunity to invest in portfolios that cover as much as three quarters of the world's market capitalization. In this way, you get access to the markets of 92 countries, including growing economies and sectors not represented in US indices. This approach provides you not only with greater stability and security, but also greater room for growth, regardless of the fluctuations of individual markets.

Diversification is the foundation of smart investing, because as John Templeton, a famous investor, once said, "The only investment program that is guaranteed to lose is a lack of diversification."

So, while the S&P 500 is a great place to start, a diversified portfolio is truly the key to ensuring long-term success and financial freedom.