How to Invest in the S&P 500 at All-Time Highs
While investors traded high-fives over the Dow Jones Industrial Average hitting 27,000, there was a high 500 to celebrate as well. Even if it didn't garner nearly as much notice, the S&P 500 index slipped past the 3,000 mark for the first time; the Nasdaq composite likewise shattered its previous record the day before, closing at 8,203.
For an encore, the S&P capped the week with another all-time record: $3,013.77, to be precise. So you can't exactly blame investors for breaking out the punchbowl with giddy toasts:
"To lower interest rates!" (So signaled a sheepish Federal Reserve chair Jerome Powell just months after threatening rates hikes all year.)
"A pox on cryptocurrency!" (Also last week, Powell gave the hairy eyeball to plans by Facebook (ticker: FB) for Libra , which then sent bitcoin skidding.)
"Who needs a golden calf when you've got a platinum bull!" (With this latest turn of events, Wall Street shows no signs of ending its historic stampede to Easy Street.)
[See: 10 of the Best Stocks to Buy for 2019.]
Which brings us back to the S&P 500 and the question of which stance investors need to take now. For if Wall Street knows how to party, it also knows how to worry -- and the U.S. is still dealing with a trade war, trouble at the Mexican border, massive debt and the near certainty of election season acrimony. Will the S&P 500 morph into the Surge & Profit $5,000? Or is there, hiding beneath all that champagne-glass bubbly, a price bubble of a much bigger sort?
Perhaps not, if you look at some of its major-player components.
"Since the S&P 500 index is weighted by market values, its largest holdings include Microsoft ( MSFT), Apple ( AAPL), and Amazon ( AMZN)," says Matthew C. Lui, vice president, investment research at Canterbury Consulting. "As these larger companies have enjoyed relative success in the last decade, strategies based on the S&P 500 have yielded positive results."
Likewise, the stock market good for now seems to far outweigh the bad.
"Since the outlook for the U.S. economy over the next few years is good with GDP projected to grow at 2% or higher, interest rates expected to remain near historically low levels and corporate profits expected to grow, the S&P 500 index continues to be an attractive investment vehicle," says David I. Kass, clinical professor of finance at the University of Maryland's Robert H. Smith School of Business.
Now, a little Index 101: Created in 1957, the S&P 500 often shares headlines -- and solid alignment -- with the Dow Jones Industrial Average, which dates to 1896. While the Dow Jones only contains 30 company stocks, including Exxon Mobil Corp. ( XOM), Boeing Co. ( BA) and Pfizer ( PFE), it also boasts a whole lotta riches. Assuming you've been a Dow Jones investor for 20 solid years, you are 152% better off; with the S&P 500, it's been a concurrent jump of 115%. That's far outpaced the rate of inflation over the same time span, roughly 54%.
Yeah, but for how long? "While the last 10 years have been great for the stock market," Lui says, "as the saying goes, 'Bull markets do not die of old age.'"
Now, that said, "There is no way to know if this bull has room to run or if it's time for the next bear to come out of hibernation," says Ali Hashemian, president of Kinetic Financial in Los Angeles. He stresses that insofar as S&P strategies go, the personal outweighs the external: "Your next move really depends on what stage of life you're in."
[See: 10 Ways to Maximize Your Retirement Investments.]
And as risk tolerance over age applies, so too does the time-tested principle of stock diversification. One way to look at it is this: Investing in an S&P-based ETF automatically gives you a basket of 500 company stocks.
"Investors simply can't afford to make oversized bets on individual securities," says Robert Johnson, a finance professor at Creighton University's Heider School of Business. "And often that is what happens to beginning investors who buy the stock of the company they work for or a product they like. When they experience failure, they withdraw from the equity markets. Investing in a broadly diversified basket of securities is a prudent strategy."
Others contend that even more diversity is needed, embracing a wide range of possibilities beyond stocks from bonds to real estate.
"Far too many investors think of the S&P 500 as being the only equity investment they need," says Daniel Kern, chief investment officer at TFC Financial Management in Boston. He points to the "lost decade" of the 2000s that hurt investors dedicated solely to U.S. mega-cap equities.
"History may not repeat itself, but is likely to rhyme, providing worthwhile investment opportunities for investors who venture beyond the S&P 500," Kern says.
Then there is the thorny issue of recency bias, something that many investors may unwittingly harbor -- especially if they've only been buying and trading for 10 years.
"There are many financial professionals in high positions with a decade of experience who have never witnessed a real bear market," says Daniel Taylor, founder and investment director at Taylor Morgan Capital Management. "This includes all of the robo advisors, who although they may be diversified are still often 60% to 90% in U.S. stocks and have no defensive strategy."
"Investors want to beat the S&P but seldom do they build portfolios like the S&P," says Deron McCoy, chief investment officer for Signature Estate & Investment Advisors in Los Angeles. "That index has 15% to 30% in defensive names depending on how you count."
So while the high-flying techs and blue-chip stalwarts of the S&P look sexy and sturdy, some of its company stocks are downright Safe & Predictable.
"Many investors don't own Exelon ( EXC)," McCoy says. "Don't own Prologis ( PLD). Don't own Stryker ( SYK), Thermo Fisher ( TMO), Comcast ( CMCSA) or Honeywell ( HON). Why? Because they're boring and aren't discussed on CNBC. Build your portfolios and be balanced and stable with defensive sectors."
But when it comes right down to it, maybe the last word on the S&P 500 should come from a first-class investor's last request.
Kass points to the 2013 shareholder letter from billionaire Warren Buffett. He's still very much alive, mind you -- but wrote that upon his death:
[See: The Complete Berkshire Hathaway Portfolio.]
"One bequest provides that cash will be delivered to a trustee for my wife's benefit. My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund."
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