Roshani Pandey is a financial advisor and founder of True Root Financial. True Root Financial is located in San Francisco, CA and serves clients across the globe.
Why shouldn’t you just invest in the S&P 500? Why diversify? This is a question I often get from prospective clients.
In his video, we will discuss why investing in just the S&P 500 is not enough and why you must diversify.
S&P 500 is only one type of asset, there are others out there
The S&P 500 only represents stocks of large US companies. But US large cap stocks are not the only assets out there. There are US small caps, US mid caps, international large caps, emerging markets, different types of bonds, etc. etc. Different assets outperform in different years. In fact for the 10 yrs from 2011 through the end of 2021, US large-cap stocks were the best performers only two times in those 10 years.
Even the most astute investor out there cannot predict which asset will outperform in any given year. So, the most logical thing to do is to diversify.
Diversification works but is emotionally difficult
Now, why do investors not want to diversify? Because diversification never feels good.
The company, BlackRock did a study where they compared an S&P 500 portfolio to a diversified portfolio over the 20+ years from 2000 to 2022.
When the market was really hot, the diversified portfolio investors lagged behind the S&P 500 investors. But, during bad times like the Dot Com bubble bursting, the financial crisis and the covid pandemic, the diversified portfolio still lost money but less than the S&P 500 portfolio.
Why you shouldn’t just invest in the S&P 500
This is the key. It is winning by losing less and over time, it adds up even though it might not feel good during those times. Sure enough, at the end of 20+ years, the diversified portfolio outperformed the S&P 500 portfolio.
If you would like to understand how we create a diversified portfolio for our clients and invest, please book an introductory call below: