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
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 can be a great investment for long-term investors and those with shorter-term time horizons. They can be especially valuable to beginning investors. That's because they won't require the time, effort, and experience needed to research individual stocks.
Is it worth investing in S&P 500 ETF? ›
The average yearly total return of the S&P 500 is 12.7% over the past 10 years. Keep in mind: That average includes years in which the S&P was down, such as 2018 and 2022. That average also includes reinvested dividends. Without dividends, the average yearly return over the past decade is just 10.6%.
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.
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.
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.
What is the downside of ETFs? ›
For instance, some ETFs may come with fees, others might stray from the value of the underlying asset, ETFs are not always optimized for taxes, and of course — like any investment — ETFs also come with risk.
Why I don't invest in ETFs? ›
Low Liquidity
If an ETF is thinly traded, there can be problems getting out of the investment, depending on the size of your position relative to the average trading volume. The biggest sign of an illiquid investment is large spreads between the bid and the ask.
Is it better to hold stocks or ETFs? ›
Stock-picking offers an advantage over exchange-traded funds (ETFs) when there is a wide dispersion of returns from the mean. Exchange-traded funds (ETFs) offer advantages over stocks when the return from stocks in the sector has a narrow dispersion around the mean.
What is the average return of the S&P 500 last 30 years? ›
Looking at the S&P 500 for the years 1993 to mid-2023, the average stock market return for the last 30 years is 9.90% (7.22% when adjusted for inflation). Some of this success can be attributed to the dot-com boom in the late 1990s (before the bust), which resulted in high return rates for five consecutive years.
Stock Market Average Yearly Return for the Last 10 Years
The historical average yearly return of the S&P 500 is 12.68% over the last 10 years, as of the end of February 2024. This assumes dividends are reinvested. Adjusted for inflation, the 10-year average stock market return (including dividends) is 9.56%.
Which S&P 500 ETF is the best? ›
Top S&P 500 index funds in 2024
| Fund (ticker) | 5-year annual returns | Expense ratio |
|---|
| Vanguard S&P 500 ETF (VOO) | 14.5% | 0.03% |
| SPDR S&P 500 ETF Trust (SPY) | 14.5% | 0.095% |
| iShares Core S&P 500 ETF (IVV) | 14.5% | 0.03% |
| Schwab S&P 500 Index (SWPPX) | 14.5% | 0.02% |
4 more rowsApr 5, 2024
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.
How long should you hold an ETF? ›
Holding an ETF for longer than a year may get you a more favorable capital gains tax rate when you sell your investment.
How much was $10,000 invested in the S&P 500 in 2000? ›
Think About This: $10,000 invested in the S&P 500 at the beginning of 2000 would have grown to $32,527 over 20 years — an average return of 6.07% per year.
Is it better to buy S&P 500 or individual stocks? ›
Is Investing in the S&P 500 Less Risky Than Buying a Single Stock? Generally, yes. The S&P 500 is considered well-diversified by sector, which means it includes stocks in all major areas, including technology and consumer discretionary—meaning declines in some sectors may be offset by gains in other sectors.
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.
