You might be forgiven for thinking that investing incrementally in the S&P500 is a well rounded ‘safe’ option.
But when it comes to investing, diversification is key.
How do we do this?
The S&P500 is one way in which to effectively invest in all 500 of the top performing companies of the US market at once.
When you buy into an index such as the S&P500, you’re buying into the top 500 companies in the US market.
What’s great about this is you effectively spread your risk across the various sectors in this market and into areas you otherwise would have not invested.
You’ve not gone out and plowed all your money into Facebook, Google or Apple. You’re not at the whim of one company's progress.
But if you move out, look at the macro - What if the S&P500 does not do so well, take September (2021) just gone as an example.
Your whole portfolio suffers.
You need more than one asset in your own portfolio to even begin diversification.
Though the S&P500 has global interests its does not hold any stocks outside of the US.
And while the US market has done remarkably well in recent months, the US market can (and has) collapsed before.
A smart investor spreads across markets, not just investing in companies in their own country.
Seeking investments in foreign and emerging markets is key in building a successfully diversified portfolio.
In 1989 Japan represented 45% of the world's stock market.
In 2021, however, they sit at 7.4%.
Today the US represents 55.9% of the world’s stock market.
It’s important to look at history and remember things change.
Jumping on the bandwagon isn’t always the smartest choice and there may be far greater opportunities elsewhere.
Interestingly in 2008, Jared Kizer (Chief Investment Officer for Buckingham Wealth Partners) found that the S&P500’s performance between March 2009 - October 2018 was almost too good to be statistically possible…
Which begs the question, how likely is the S&P to continue to perform this way?
Many invest monthly into the S&P500 in order to sustainably grow their portfolio, this is called cost-dollar averaging.
This is a good option when it comes to avoiding the paralysis that stems from waiting for ‘the right time’.
There is no right time.
Time in the market beats all.
Budgeting monthly for your contributions to your portfolio is no doubt a smart thing to do and we’re all in agreement today is the best day to start.
However it is compounding the issue of diversification if you only invest in one thing.
You need to combine your spread of assets, markets and time in order to successfully diversify and essentially protect your portfolio balance.
If you’re ready to start your journey but still feel overwhelmed by all the information, maybe our 30 minute course could help you. The first 4 videos are FREE and we make starting investing simple.