S&P 500 performance is the yardstick for measuring investment returns. Often you hear about how someone beat the market, or how most can’t beat the market in the long term. There is even a school of thought out there that advocates for passively investing in the S&P 500 no matter what at all times. I think that a strategy like this might work for some but is much more problematic than most realize. Let’s look at why my portfolio contains more than just the S&P 500.

Time

How long has the S&P 500 hundred been in existence? In its current form, since 1957. Before that, it had less than 500 companies. Let’s look at it this way. Gold has been worth money for 5,000 years, and the S&P 500 hasn’t even been around for 100. What are the chances that the S&P 500 is around in 2,000 years? How about 200? How about 100? I am not so sure that we will have the S&P 500 in the next century. You can see why I wouldn’t want all of my money tied up in an investment vehicle like that.

Dominance

One of the reasons the S&P 500 has had such success was because of the economic position of the United States in the last century. In 1957 it was easy to be the largest economic powerhouse in the world when we were one of the only countries to embrace free market capitalism. Or at least adopt free market principals to the extent that we did. The cat is out of the bag on Capitalism. Look at the landscape now. You have the emergence of Japan in the 80s followed by Korea and China, the fall of the Berlin wall, etc. All the while, the United States is turning away from the same free market principals it once used to create prosperity in its history in the first place. Look no further than the wage controls and tariffs that are so fashionable today. The easy gains that allowed the companies in the S&P 500 to flourish might not be so easy in the future.

Maturity

In order for the S&P 500 to thrive it needs a healthy environment. One of the best ways to achieve that is by having a constant influx of new companies competing and overtaking some of the older less efficient companies. Unfortunately what we have been experiencing has been the opposite. The average age of companies has grown in the past few decades. What this indicates is that fewer companies are competing for dominance in the free market. The behemoth companies that the S&P 500 are comprised of often have little competition to deal with. Also, they lobby Washington for monopolistic legislation and sometimes receive corporate welfare and special tax incentives that a newcomer in the sector would not receive. If a company does manage to compete, it will likely be acquired by the dominant company in the sector. All of this dependence is what is needed for these companies to survive? If so, I am not all that optimistic about the long-term prospects for many in the S&P 500.

Tools of the Trade

Imagine judging a painter only on their ability to use the color green. Or an electrician solely on their ability to use wire cutters. Doesn’t it seem silly to not take into account other colors for the artist, or other tools and skills for the electrician? If I were to only participate in the S&P 500 index with all of my money at all times, I would be no different than the artist or electrician in our example. The S&P 500 is only going to do well if the largest 500 companies in the index do well. So many other choices to invest in that could round out my portfolio. Say I wanted some protection against recession, I could also hold onto some cash. How about Government bonds in case of a deflation? What if what I need is passive income from real estate and dividend stocks? No way am I going to limit myself to what the S&P 500 gives me. Investing is so much more than that. At different times in my life, I am going to need different things from my assets. Just because the S&P 500 has done well in the past doesn’t mean that I’m all in all the time.

Gaps

Constant maximum participation in the S&P 500 won’t offer me any protection in a long-term bear market. Say I am retiring and the index crashes hard or stays sideways for a few decades? I will be in a world of hurt in this scenario. The situation doesn’t have to be this dire, say that the trend reverses and new companies start to come onto the scene. I might be better in small or mid-cap companies. Same could be true for emerging markets or any asset class. Usually, a type of investment will do great for a while, decades even. An out of favor asset class can experience the opposite. It’s not that far fetched to think that the S&P 500 could go through a rough patch for a couple of decades. No need to be foolish and reckless by going all in on the S&P 500 index because I want to be greedy and I speculate that it will keep doing great just because it has done so in the past. It is also foolish to assume that the index will be the bellwether it has been in the future. Preservation of wealth can be as important as wealth creation. Past performance doesn’t guarantee future results.

Caveat Gains

The stock market seems like it is always going up because the companies are based in Dollars or a similar fiat currency, a currency that is constantly eroded due to inflation. Many don’t consider that the gains wouldn’t be as significant if we adjust them for inflation. Add in capital gains tax and account fees to add insult to injury. My name is Mychal Raynes. Here at Any Economy, we try to prosper in any economic environment. If you have made it this far then, you might want to get more of my investing and economic commentary for free. All you have to do is sign up below.