How investors can think about the record market rally's road ahead

S&P 500 Hits Record Highs: Key Investment Strategies if Markets Retreat

Think of investing in the S&P 500 like owning a big fruit basket. It looks full and colorful, but if most of the fruit is apples, and apples go bad, your whole basket suffers. That’s why understanding what’s inside your investments really matters.

Why Investors Care About the S&P 500’s Record Highs

The S&P 500 hit another record high this week. That sounds great, but some investors are asking if the good times can last, or if a drop (called a “pullback”) could be around the corner. When things go up for a long time, it’s natural to wonder if they’ll come back down.

Many people put their money in S&P 500 index funds like SPY, VOO, or IVV because they think it’s a safe and simple way to invest. After all, the S&P 500 covers 500 big American companies.

Bull Case: Reasons to Feel Good

  • The S&P 500 has a long history of growth. Over the last 50 years, it’s averaged about 10% returns per year (S&P Global).
  • Big tech companies have helped the index reach new highs, pushing up the value of many portfolios.
  • If you stay invested for many years, you’re likely to do well—even if there are bumps along the way.
  • Wall Street experts mostly think the S&P 500 will keep rising for now.

Bear Case: Reasons to Be Cautious

  • The S&P 500 is “market cap weighted,” which means a few huge companies (like Apple and Microsoft) make up a big part of the basket. If they do badly, the whole index can sink.
  • It’s heavy on technology stocks, so if tech stumbles, the whole index feels it.
  • The S&P 500 can have long periods of poor performance. For example, from 2000 to 2008, it fell more than 30%.
  • Just owning the S&P 500 doesn’t cover smaller companies or international markets, which sometimes do better.

Alternatives to the S&P 500

Some experts suggest looking beyond just the S&P 500 for a more balanced portfolio:

  • Total Market Index Funds: These funds include small and mid-sized companies too, not just the biggest ones. This gives you a wider mix.
  • Extended Market Funds: These can be paired with an S&P 500 fund to add stocks that aren’t already in the big index.
  • Equal-Weighted S&P 500 Funds: These funds give each company an equal slice, not just the biggest ones. This can help reduce risk, but may cost more to manage.
Related:  Paul Tudor Jones Sees Potential Market Rally Ahead, Signaling Key Opportunity for Investors

If you don’t want to keep shifting your money around, a total market fund can be a simple “set it and forget it” option—especially in retirement accounts like a 401(k), where you don’t have to worry about taxes from switching funds.

Risks of Overlapping Funds

Mixing different funds can be smart, but watch out for owning too many funds with the same companies inside. For example, if you own both an S&P 500 fund and a growth fund, you might have a lot of money in the same big tech companies. That means you’re not as diversified as you think.

History shows that during tough times for the S&P 500 (like 2002 to 2009), other types of investments—like small companies, value stocks, international stocks, or even bonds—sometimes did much better. Building a balanced portfolio can help smooth out the rough patches.

Investor Takeaway

  • Don’t assume the S&P 500 is fully diversified. It’s heavy on big tech companies, so you may want to add other types of investments.
  • Consider total market or international funds for a broader mix of stocks.
  • Check your portfolio for overlap. Make sure you’re not doubling up on the same companies by owning similar funds.
  • Remember the long game. The market goes up and down, but patient investors usually come out ahead over many years.
  • Review your mix once a year to make sure it still fits your goals and risk tolerance.

For the full original report, see CNBC

Similar Posts