1 Investment Many Money Experts Agree On
Written by
Angela Mae
Edited by
Zuri Anderson
Commitment to Our Readers
GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.
20 Years
Helping You Live Richer
Reviewed
by Experts
Trusted by
Millions of Readers
Everyone’s got a different investment strategy, but many experts agree that diversification is key to long-term success. One of the most commonly recommended ways to do this? Invest in the S&P 500. After all, it worked for billionaire Warren Buffett, so why shouldn’t it work for someone else?
But while many financial experts do agree that investing in the S&P 500 is worth your while, it’s not necessarily the only option. What’s most important, it would seem, is diversifying your portfolio to balance the risks and rewards of investing.
Also learn about the worst investing mistakes to avoid at all costs.
The S&P 500 Is a ‘Safe Bet’
For many investors, portfolio diversification is vital.
“I would say the best investment is, first, diversify — but not too much. For example, grab some S&P 500. Very, very safe bet,” David Capablanca, host at The Friendly Bear Podcast. “Over the long term, the U.S. is going to keep going higher.”
The S&P 500 offers built-in diversification with its index of 500 large U.S. companies. Since 1928, it’s also seen an average annualized return of 10.06% (or 6.79% when adjusted for inflation).
“Diversification helps to avoid unpredictable risks specific to a single company,” said Asher Rogovy, chief investment officer of Magnifina, LLC. “These risks are rare but can ruin a portfolio concentrated into just a few positions.”
Still, no investment strategy is without risk. Investing solely in the S&P 500 means some level of concentration risk. To illustrate, nearly 32% of the index is in information technology companies.
The other downside to investing solely in the S&P 500 is that the returns might not be high enough to justify doubling down.
“With 500 stocks, it is certainly extremely well diversified. But diversification can cut both ways,” said Rogovy. “Despite the lower risk, the returns are mediocre by the standards of many investment professionals.”
Invest Beyond the S&P 500
Oftentimes, a good investment strategy is a sophisticated one — one that considers the short- and long-term potential alongside the risks.
“Short-term investments are not as risky about the investment, but more so liquidity where you can quickly get it back into cash and then spend it,” said Sergio Altomare, co-founder and CEO of Hearthfire Holdings. “That’s where an S&P 500 kind of investment would be a good place to be.”
With the S&P 500, investors can take a “set-it-and-forget-it” approach. They don’t need to try to time the market — as notoriously futile as that tends to be. They can put their money in stocks and move onto other things, potentially ones with greater returns and more risk.
“The smart money is looking where the big dollars are headed in private equity, like businesses and some cryptocurrencies,” said Altomare. “However, that is more speculation than an investment due to its volatility.”
Other, less speculative options exist, too. Along with diversifying into stocks, real estate investments and private lending could be worthwhile. The same goes for other options like gold or crypto. Each comes with its own risks, returns and time horizon, so invest strategically and with a plan for the future.
“My suggestion is always to evaluate your existing life situation, make your short-term, mid-term, and long-term goals, and then build an equivalent investment portfolio,” said Altomare.
More From GOBankingRates
