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
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.
What happens if I only invest in the S&P 500? ›
Investing only in the S&P 500 does not provide the broad diversification that minimizes risk. Economic downturns and bear markets can still deliver large losses. The past performance of the S&P 500 is not a guarantee of future performance (yeap, and we'll get back to that!)
Is it smart to only invest in ETFs? ›
ETFs make a great pick for many investors who are starting out as well as for those who simply don't want to do all the legwork required to own individual stocks. Though it's possible to find the big winners among individual stocks, you have strong odds of doing well consistently with ETFs.
Is it worth investing in S&P 500 ETF? ›
The Vanguard S&P 500 ETF (VOO 1.01%) is one of the best ways to invest in the S&P 500, which has been a pretty smart strategy over the long term. Since 1965, the S&P 500 has produced a total return of 10.2% annualized. The Vanguard ETF has an expense ratio of just 0.03%, so you get to keep most of your gains.
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? ›
Over the past decade, you would have done even better, as the S&P 500 posted an average annual return of a whopping 12.68%. Here's how much your account balance would be now if you were invested over the past 10 years: $1,000 would grow to $3,300. $5,000 would grow to $16,498.
How much do I need to invest in the S&P 500 to be a millionaire? ›
If the S&P 500 outperforms its historical average and generates, say, a 12% annual return, you would reach $1 million in 26 years by investing $500 a month.
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.
Is it OK to just invest in ETFs? ›
ETFs can be safe investments if used correctly, offering diversification and flexibility. Indexed ETFs, tracking specific indexes like the S&P 500, are generally safe and tend to gain value over time. Leveraged ETFs can be used to amplify returns, but they can be riskier due to increased volatility.
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.
In 1980, had you invested a mere $1,000 in what went on to become the top-performing stock of S&P 500 (^GSPC 0.49%), then you would be sitting on a cool $1.2 million today. That equates to a total return of 120,936%. The stock? None other than Gap (GPS 2.90%).
How much would $10,000 invest in the S&P 500? ›
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.
What is the 20 year return of the S&P 500? ›
The historical average yearly return of the S&P 500 is 9.74% over the last 20 years, as of the end of February 2024. This assumes dividends are reinvested. Adjusted for inflation, the 20-year average stock market return (including dividends) is 6.96%.
How long should you hold ETFs? ›
Holding an ETF for longer than a year may get you a more favorable capital gains tax rate when you sell your investment.
What ETF is better than the S&P 500? ›
The S&P 500's track record is impressive, but the Vanguard Growth ETF has outperformed it. The Vanguard Growth ETF leans heavily toward tech businesses that exhibit faster revenue and earnings gains. No matter what investments you choose, it's always smart to keep a long-term mindset.
Should I buy SPY or VOO? ›
Over the long run, they do compound—those fee differences—and investors have been putting a lot more money into VOO versus SPY. That is the reason why we view VOO slightly better than SPY. And that is just the basic approach, which is the lower the investor can pay, the better the investment is.
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.
What if I invested $500 a month in S&P 500? ›
If you starting investment is $500 and you can budget an additional $500 each month, your investment could grow to $1 million after about 30 years. Historically, the S&P 500's average annual returns are around 10%. Returns are significantly higher in some years, while the index has negative returns in some year.
Is it smart to invest in the S&P 500? ›
“When you buy the S&P 500, 90% of the time you're likely to outperform an active portfolio manager picking large-cap stocks,” says Joe Favorito, managing partner at Landmark Wealth Management. The best way to invest in the S&P 500 is to buy exchange-traded funds (ETFs) or index funds that track the index.
