If you invest in the stock market, then at least part of your money is probably in an S&P 500 index fund or with one of the companies comprising the S&P 500.
The index alone covers roughly 80% of available market capitalization, according to S&P Global. The companies that belong to it cover every industry and economic sector you can name. That’s why most financial advisors recommend investing in the S&P 500 if you want maximum diversification.
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But is that really the case? Maybe not, according to finance expert and ex-Wall Street trader Vivian Tu, aka “Your Rich BFF.”
In a recent YouTube video, Tu acknowledged that the S&P 500 has “long been the benchmark” for the stock market, and the index fund that tracks it has been a “quick and easy way” to build a diversified portfolio.
But lately, she said, the S&P 500 has gotten “more and more concentrated” among only the biggest companies.
“Most people buying S&P 500 index funds are assuming they’re buying a little piece of 500 different companies, hence the 500,” Tu said. “And while that’s sort of true, it turns out the top 10 largest companies account for about 40% of the index.”
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Tu likened investing in the S&P 500 to a “mega bag” of Halloween candy. You assume the bag would have many different flavors — only to get home and find that half of them are Almond Joys.
“Right now, investing in the S&P 500 is in large part taking a bet on the Magnificent Seven tech stocks. Not perfect if your goal was to invest in a bunch of different stuff,” Tu said.
She doesn’t want to dissuade investors from having positions in the S&P 500. But she does recommend spreading your money around beyond the index.
To diversify your portfolio, Tu recommends index funds that track foreign markets. She also favors sector funds that focus on non-tech industries such as energy, industrials, healthcare, consumer and retail.
“And last but not least, look at funds that focus on small cap or mid-cap companies versus some of those ultra-large players,” Tu said.
She’s not the only one who recommends branching out from the S&P 500. AMG Wealth offered much the same advice in a blog titled “Diversification Requires Thinking Beyond the S&P 500 Index.” In the blog, AMG advised spreading your money into a diverse mix of bonds, large- and small-cap funds, emerging markets, real estate and alternative investments.
