Experts say S&P 500 ‘broken’ despite recent record high — is Warren Buffett’s ‘set it, forget it’ strategy obsolete?

On October 8, the S&P 500 reached a record high of 6,753.72 amid an ongoing government shutdown. (1)

If you’re someone who’s heavily invested in it, you may be feeling pretty good about the state of your portfolio. But if your primary investment strategy is to hold an S&P 500 index fund or ETF and call it a day, you may want to rethink it.

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Warren Buffett has long been a fan of this strategy. In 2008, Buffett was asked what strategy a typical amateur investor should employ. His response?

“I’d probably have it all in a very low-cost index fund … and then I’d forget it and go back to work,” Buffett shared during a 2008 Berkshire Hathaway shareholders meeting. “You’ve got a perfectly decent return over a 30- or 40-year period by doing what I suggest.” (2)

But while S&P 500 index funds and ETFs have long been regarded as the perfect “set it and forget it” type of investment, there are drawbacks to having all of your money in either option. And experts are beginning to sound the alarm.

“The S&P 500 is broken,” Michael DeMassa, a certified financial planner and chartered financial analyst, shared with CNBC. (3)

The danger of putting all your money in the S&P 500

The S&P 500 is a stock market index that tracks the performance of roughly 500 of the largest publicly traded companies in America — weighted by their market capitalization. Market cap is calculated by multiplying a company’s current share price by its outstanding number of shares.

Generally speaking, companies with a larger market cap are considered more stable and less risky than companies with a smaller market cap. For this reason, the S&P 500 is generally considered a good option for everyday investors — it consists of established companies with large market caps, as well as a diverse range of other businesses.

The problem with the S&P 500 is that it’s not as diverse as some people might think, and a big reason is that it’s a market cap weighted index. This means the companies with the largest market value have the most influence on the index’s performance.

Currently, the S&P 500 companies with the largest market cap include NVIDIA, Microsoft, Apple, Tesla, Alphabet (Google), Amazon and Meta (Facebook). Notice anything about these names? They’re all tech companies.

What this means is that if there’s a broad downturn in the tech industry, that could easily take down the S&P 500 on a whole, leaving its investors with serious losses — at least in the short term. This doesn’t mean that it won’t eventually recover, but the S&P 500 has suffered through prolonged dips in the past.

For example, between 2000 and 2008, the S&P 500 was down by more than 30%. In March of 2009, it reached its lowest point of the Great Recession, closing at a price of $676.53. (4)

The S&P 500 has proven it can recover from downturns — even significant ones. All you need for proof is to compare that 2009 price to where the stock market index is at today. But it still poses a risk to investors who may not have years to wait out a recovery, like those on the cusp of retirement.

While Wall Street forecasts predict the S&P 500 will continue to go up — at least for the foreseeable future — experts suggest a broader mix of investments in case there’s a downturn. With this in mind, if you’re heavily invested in the S&P 500, you may want to look beyond this option in order to protect your investments.

Read more: How much cash do you plan to keep on hand after you retire? Here are 3 of the biggest reasons you’ll need a substantial stash of savings in retirement

How to diversify your portfolio

There’s nothing wrong with putting some of your money into an S&P 500 index fund or ETF and calling it a day, but it’s a good idea to branch out beyond that one offering.

One thing you may want to consider is putting money into a total stock market fund — which invests in a wide range of American stocks consisting of large-cap, mid-cap and small-cap companies. Total stock market funds include a far greater number of companies than the roughly 500 different stocks that the S&P 500 is limited to.

A total stock market fund could lead to better diversification in your portfolio, which, in turn, could lead to more protection during a market downturn. That said, small-cap stocks — which are a component of total stock market funds — tend to be riskier by nature, so you’ll need to weigh that against added diversification.

Other options for diversification include:

• Owning different asset classes, like bonds, which tend to be less volatile than stocks — and CDs, which are very safe provided your bank is FDIC-insured

• Investing in real estate by owning physical property or real estate investment trusts (REITs)

• Putting money into commodities like gold that tend to be a hedge against inflation and market volatility

• Investing in international stocks

You can also look to buy some individual dividend stocks to balance out an S&P 500 index fund or ETF. By nature, the S&P 500 tends to be influenced heavily by growth stocks, which can be more volatile.

Dividend stocks can help balance things out, and the income they provide in the form of dividend payments can help offset losses during periods of market decline.

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Article sources

We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines.

Los Angeles Times (1); YAPSS — YouTube (2); CNBC (3); Benzinga (4)

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.