Investing in the S&P 500 alone is not the silver bullet

IN RECENT years, I hear more and more investors say that all they need is to invest in an exchange traded fund or index fund that tracks the S&P 500 index to get the investment returns they need. In this article, I hope to dispel this myth.

Using the S&P 500 as well as the more diversified MSCI All Country World Index (ACWI), which includes developed markets outside the US as well as emerging markets, I looked at the cumulative returns for each of the 10-year investment periods based on monthly intervals between Jan 1999 to Dec 2023.

As reflected in the accompanying graphic, there were 181 of 10-year periods over the 25 years. This means that if an investor has a 10-year investment horizon, between Jan 1999 to Dec 2023, on a monthly basis, there were 181 possible 10-year periods where investors could have been invested in.

The first 10-year period was from Jan 1999 to Dec 2008; the second period was from Feb 1999 to Jan 2009; and so on. The last 10-year period was Jan 2014 to Dec 2023.

A few observations can be made:

• For the MSCI ACWI, there were seven 10-year periods with negative returns in the 25 years. For the first five months of 1999, regardless of the month an investor started investing in, his returns were always negative after 10 years. For the S&P 500, it was worse. There were 23 negative 10-year periods and they all happened in the first 23 months of the 25 years. This means that between Jan 1999 to Nov 2001, regardless of which wonth an investor started investing, his returns were always negative after 10 years.
• For the MSCI ACWI, the annualised return for the 25 years was 5.92 per cent, whereas S&P 500 did better at 7.56 per cent a year.
• When planning for our clients’ financial goals, we used a gross planning return of 8.2 per cent a year for a 100 per cent globally diversified portfolio of equities. We estimate this using the Ibbotson-Chen model. This is the return an investor would need to reach his goals if he is able and willing to take the risk of investing into equities.

While both indices yield positive returns over the long term, there were 15 and 23 periods when the MSCI ACWI and S&P 500, respectively, failed to meet the needed returns.

From these observations, we can draw several applications:

• While it is true that staying invested in an S&P 500 tracker fund over the long term will yield positive returns, you might invest in a period where you might not get the returns you need or even lose capital.
• If you invest in a single index like the S&P 500, there may be prolonged periods of negative returns or periods where you cannot get the returns you need, even if they are positive. So, even if you have a 20-year time horizon, after 10 years of losses, you may bail out and thus lose capital.

However, during periods where S&P 500 was in a prolonged downturn, the MSCI ACWI was generating positive returns. Therefore, it would be wiser for investors to be globally diversified. You may get a lower return than investing in a single index but you are able to stay invested to get the returns you need.

• The US market has done well over the past 100 years but there is no guarantee that things will remain the same in the future. You really do not want to risk all your money in a single country index.

When investing for the purpose of enabling non-negotiable life events such as retirement, we need to use an approach that gives us the highest probability of success. Simply investing in a single index like the S&P500 index is not the silver bullet.

The writer is chief executive officer of Providend, South-east Asia’s first fee-only comprehensive wealth advisory firm