Is investing in the S&P 500 good enough?

The S&P 500 was up by more than 23% last year – not bad, right? Investing in low-cost ETFs tracking broad indexes like the S&P 500 has gained much popularity for a reason. It sounds like a no-brainer – strong returns, diversified exposure, and low fees. So, why not just put all your money in there?

The appeal of the S&P 500 is clear. It gives investors a stake in the top 500 companies in the US, which by far remains the largest economy in the world. The US has dominated global markets for decades, with the S&P 500 delivering an average annual return of 9% over the last 20 years. Is a single ETF all that your investment strategy needs?

Good news: Investing in the S&P 500 is better than doing nothing

With $100,000 invested in the S&P 500 over 20 years, you’d have over $560,000 today. Certainly, that’s better than keeping all your money in cash. In Singapore, the average inflation rate stands at around 2%. If you’d kept your cash in a savings account at an interest rate of 1% for that period, the real value of your cash would have fallen 1% on average each year.

Going all-in on the S&P 500 is also definitely a wiser move than trying to stock-pick – a game of chance that even professionals struggle to get right. Over the last 10 years, only 15% of active funds in US equities outperformed their passive counterparts. And let’s not forget that these actively managed funds also come with higher fees – an initial sales charge, an annual management fee of 1-2%, plus additional costs buried in things like currency exchange – which all quietly eat into your returns over time.

All that’s to say, the S&P 500 is far from the worst place to put your money.

The not-so-good-news: The S&P 500 may not be as diversified as you think

While the S&P 500 consists of global companies that operate across multiple markets, 71% of its revenue still comes from the US. Investing solely in the S&P 500 means limited exposure to other geographies, such as emerging markets or Asia.

More importantly, the S&P 500 today is more concentrated in a single sector than ever before. Tech now accounts for roughly 40% of the index, compared to 20% for financial services at its height in the 1990s to 2000s.

The biggest tech companies, the so-called Magnificent Seven (Apple, Microsoft, Amazon, Nvidia, Alphabet, Meta, and Tesla), comprise about 28% of the S&P 500’s market capitalisation. In contrast, the top seven companies in 1990, including the likes of IBM and ExxonMobil, only made up 15.4% of the index.

While big tech has driven much of the market’s growth, over-exposure to a single sector could increase volatility, whereby a pullback in tech would result in a significant drawdown in your portfolio. Earlier this year, for example, DeepSeek’s low-cost AI model spooked investors, leading to a sharp selloff in US tech stocks and a 1.5% drop in the S&P 500 within a single day.

Relying solely on the S&P 500 also means missing out on potential opportunities in other sectors, such as the financial sector, which could benefit from a more expansionary fiscal policy this year.

Your risk appetite matters too

It’s not just about concentration risk in a few companies, in a single sector, or in the US economy. Your risk tolerance also matters in determining your personal investment strategy. While the S&P 500 has trended up over the long term, the path was not always smooth. To reap the long-term benefits, you’ll need to ride out the inevitable ups and downs of the market.

When the COVID pandemic started, the S&P 500 dropped by 34% in 5 weeks. In 2022, the index fell around 25% from January to October, as aggressive interest rate hikes led to fears of an economic slowdown. The question is: Can you sleep well at night and continue to invest consistently during such downturns?

If the answer is yes, then consider building a long-term portfolio with 100% equities, but perhaps seek broader diversification within equities. If not, adding balancing assets like bonds and gold can help provide a hedge for your portfolio.

Gold, for one, is a good diversifier as it’s relatively uncorrelated to equities in good times and positively correlated to equities when the stock market is doing exceptionally well. It has performed particularly well in periods of high inflation like today. In fact, this safe-haven asset was up nearly 27% in 2024; it’s been a major contributor to the performance of StashAway’s General Investing portfolios, which have a 7.2% average exposure to gold across risk levels.

Diversifying beyond the S&P 500 doesn’t have to be complex

Investing in a broad-based ETF is a great starting point. But to build a truly diversified portfolio, it’s important to consider how you allocate your funds across different asset classes, geographies, and sectors.

And that’s a lot to think about. For most of us with full lives to live and loved ones to spend time with, managing a multi-asset portfolio can be time-consuming, complex, and expensive as fees start stacking up.

Of course, there are easier ways to achieve diversification without all the hassle. Digital investment platforms, for example, offer passively managed portfolios that are globally diversified, with asset allocation to equities, bonds, fixed income, and gold based on your risk appetite. That’s one way you can grow your wealth while sticking to the three golden rules of long-term investing: Diversify, dollar-cost average, and steer clear of high fees.