Should I just buy the S&P 500?
Why do I need a financial advisor? Shouldn’t I just buy the S&P 500?
Good question. Maybe you don’t need an advisor!
Your instincts are right – buying a low-cost index fund is a great idea for almost everyone. But there are a few things to consider before you go off and do that:
You are ignoring half the global stock market if you only own the S&P 500.
You might want more than just stocks.
There’s a lot more to consider in your financial life than what to do with your savings.
Let’s take each one in turn:
1. You are ignoring half the global stock market if you only own the S&P 500.
When you buy the S&P 500, you are buying large U.S. companies, which represent about half of the total global stock market by market cap. You don’t own any small or mid-sized companies in the US, and you don’t own any foreign companies.
To be fair, the S&P 500 contains some of the most successful businesses in the world, and there have been many periods in history where it outperformed the rest of the global market. But if you only own the S&P 500, you’re making a bet on large U.S. companies continuing to outperform the rest of the world’s stock market. Maybe that bet will pay off for a while, but there’s no obvious way to know if it will, and it certainly won’t pay off forever.
A more diversified portfolio can give you exposure to U.S. companies of all sizes as well as companies around the world.
2. You might want more than just stocks.
If you are young, with a long career ahead of you, a solid emergency fund, no plans for a big short-term purchase like a house, and you can stomach the ups and downs of the market, I’d have you stick to stocks. But if any of those don’t apply to you, you probably want to own some bonds or other assets that diversify you away from stocks.
What else should you own, and how much? That’s a topic for another day, and will really depend on your circumstances.
3. There’s a lot more to consider in your financial life than just what to do with your savings.
If you feel like you have a good handle on your overall financial life, you may not need an advisor. Can you comfortably describe your plan for all of the following?
Risk management: Do you have appropriate coverage for your health, your home, your income, and your family?
Estate planning: What happens to your finances if something happens to you?
Tax planning: Are you taking advantage of the relevant tax-sheltered accounts like IRA, Roth IRA, 401(k), etc. for your specific situation?
Retirement – Are you saving enough? Are you saving too much and could be enjoying more of your money today? How do you know?
There are also questions about when to claim Social Security, how to handle a concentrated stock position, whether to pay down your mortgage, how much cash to keep on hand, how to fund college, how to give to charity, and a hundred other decisions that come up over the course of a financial life.
If you are into this kind of stuff and like figuring it all out on your own, you should do that! But if you want to go [insert your hobby here] instead, get someone who likes this stuff to help you out. Buying the S&P 500 is not a bad start – but there’s a lot more to it than that.
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
