People often make the mistake of investing purely in the S&P 500 because it encapsulates the stocks of 500 large-cap US companies without realizing the risks — or rewards — of a globally diversified portfolio. Consider a globally diversified portfolio to reap rewards beyond the S&P:
1. Tracking Error
The S&P is limited to the US, while a globally diversified portfolio offers lower volatility and similar returns over time. Owning just the S&P exposes one to a “tracking error” of a globally diversified portfolio.
2. Sequence Risk
If you retired in the year 2000 and had all of your money in the S&P 500 (just following 10 years), the S&P would have had a small negative return. This means your money wouldn’t have grown at all. Whereas, in a globally diversified portfolio, it would have doubled.
3. Market Fluctuation
There will always be times when a globally diversified portfolio beats the S&P, like from 2000-2009. There are also going to be times the S&P beats the globally diversified portfolio, like from 2010 until now. But over time, they zig and zag and nobody knows when one is going to out-perform (or when returns are going to come). So, owning the globally diversified portfolio with lower risk makes more sense.
The important thing to remember when investing is that you’ll have a similar-to-higher return with a globally diversified portfolio over time vs. just investing in the S&P 500. If you are going to take the risk of investing, why not invest smartly and reap the rewards of long-term investing?