The S&P500 is the reference for most
The S&P 500 is one of the most well-known stock market indices in the world and a key benchmark for most investors. But is it really the best strategy to invest all your money in this index?
The S&P 500 is widely regarded as the best indicator of large-cap stocks in the US. The index includes 500 leading companies and covers approximately 80% of the available market capitalization. Therefore, through the S&P 500 we gain exposure to some of the largest and most successful companies in the US, but like any investment, it has its pros and cons. In this article, we explore its advantages, disadvantages and what history teaches us about the importance of diversification.
The good thing about investing in an index like the S&P 500
Passive or index management, i.e. investing with indices, is undoubtedly one of the most efficient ways to make our money profitable. And the S&P 500 is undoubtedly one of the most important indices. The US market represents 65% of the MSCI ACWI (All Country World Index).
Because the S&P 500 includes the 500 largest U.S. companies by market capitalization, it provides significant diversification. It brings together technology, pharmaceuticals, banks and other sectors, and its composition is constantly updated, with companies that fall out of the ranking periodically replaced by others that stand out according to pre-established criteria. (See appendix.)
As we have seen on other occasions, the S&P 500 index is not exempt from large falls and although it falls quickly, it rises more and more for longer. Historically, it has bullish cycles that can last between 2 and 12 years, while bearish cycles have an average duration of 1.1 years. But in some cases they can last up to 2.5 years, as in the case of the “Technology Bubble” that can seem endless (See chart above).
Thanks to the index’s adaptability and representativeness, investors automatically incorporate new success stories without having to make adjustments. NVIDIA is a good example of this over the past two years: its growth has driven the index. In other years, it was other big tech companies. Investing in the S&P 500 means automatically benefiting from the rise of these giants. Now it’s the tech companies, in the past it was the railroads, banks or oil companies. By investing in the index, we get optimal management for free without having to guess which company or sector will do best.
This is the great benefit of investing through indices: and this is not only applicable to the S&P 500 but also to the major global indices.
Should you only invest in equities?
Investing only in the S&P 500 means being 100% exposed to equities, which may not be suitable for achieving all financial goals or investor profiles. Equities, while offering long-term growth opportunities, also entail greater volatility and the risk of significant declines. Recent examples include the crisis linked to recent inflation and the war in Ukraine (2022/2023) and the abrupt fall (-34%) of the market during the COVID-19 pandemic in 2020. Not to mention the great financial crisis of 2008 where it fell by 50%. Therefore, before deciding to invest exclusively in this index, it is essential to assess risk tolerance and personal financial goals.
In any case, it is worth remembering that before investing we must have a good emergency fund and for this our savings portfolio can be ideal.
But is it enough to invest only in the S&P 500?
Even if our goals allow us to invest mostly in equities, is it enough to invest only in the S&P 500? The answer is no. Although investing in an index is a smarter and easier option for most than choosing individual stocks, it presents a problem: concentration risk. Betting only on the US distances us from the opportunities of investing in the globalized world in which we live. As we have seen, although the S&P 500 represents 65% of the world’s stock market capitalization, it does not cover the other 35%, nor other classes of financial assets.
Moreover, the S&P 500 is currently highly concentrated. Despite including 11 economic sectors, it is dominated by technology. Today, companies such as Apple, Microsoft and Google, as well as NVIDIA and TESLA, make up a significant part of the index. If the technology sector suffers, so does the S&P 500.
Currency risk
Investing exclusively in the S&P 500 involves taking on currency risk, especially for international investors, and in particular for Europeans. Since the S&P 500 is denominated in US dollars, an investor whose base currency is, for example, the euro will not only be exposed to the performance of the index, but also to changes in the EUR/USD exchange rate. This means that even if the S&P 500 achieves positive returns in US dollars, a depreciation of the dollar against the euro could reduce or even negate the gains in terms of the investor’s local currency. This exposure to a foreign currency can add unnecessary volatility to the portfolio and should be carefully considered before making an investment decision.
On the other hand, for investors whose local currency tends to depreciate against the dollar, as in many Latin American countries or even in China, investing in dollars can be a beneficial strategy. However, this is not an absolute rule, as exchange rate fluctuations depend on multiple economic and geopolitical factors.
Cycles and changes in market leadership
Over the past 15 years, US stocks have led the global market, especially after the 2008 financial crisis. However, this has not always been the case. Throughout history, the US and other markets have exchanged leadership positions:
- 1970s: Europe and Japan grew rapidly while the US suffered from stagflation and energy crises.
- 1980s: The US re-emerged with economic reforms and deregulation.
- 1990s: The dot-com boom consolidated American technology companies.
- 2000s: After the dot-com bubble, emerging markets (China, India, Brazil) grew faster than the US.
Since 1975, the S&P 500 has gained 31,411%, for an annualized return of 12.1%. By comparison, the MSCI World Ex-US (a global index excluding the US) has returned 5,025%, equivalent to an annualized return of 8.2%. The gap in returns between the S&P 500 and the MSCI World EX-US has widened since the 2008 crisis, as we will see below.
Since 2008 the S&P500 has dominated…but
Since 2008, the US has dominated thanks to technological innovation and expansionary monetary policies. Since then, the S&P 500 has accumulated a 490%/10.9% annualized (CAGR) while the MSCI World Ex-US has lagged far behind with a 93.5%/3.9% annualized return.
The impressive rally of the S&P 500 in recent years has led many investors to believe that investing exclusively in this index is the key to financial success. This perception is understandable, as our psychology tends to give more weight to recent events, influencing our investment decisions.
But we have already seen that history shows that leadership is not permanent.
For example, so far in 2025, Europe (with the MSCI Europe up 9.4%) has significantly outperformed the S&P 500 (2.2%), with a difference of 7.2 percentage points as seen in the chart above.
We cannot know whether this marks a change in trend, nor is it the intention of this article to determine that. However, it seems that the good performance of the European indices is related to the increase in defense spending, which could be stimulating the economy.
The important thing to understand is that it is not necessary to predict these movements in order to make good investment decisions. A good example of this is that, regardless of whether the above argument about increased defense spending is true or not, an investor investing through indices does not need to anticipate these factors. His only task is to make sure that he maintains a diversified exposure that includes the main macroeconomic regions, and Europe is certainly one of them.
The importance of diversification
Investing only in the S&P 500 could be a risky bet in the long term. When we asked ourselves if the stock markets were expensive, we saw that the Forward P/E of the S&P 500 was 22.6 vs. 14.5 for the MSCI World Ex-Us according to the chart we have recovered.
Another example, in the period 2001-2010, the S&P500 had a profitability close to zero.
While in the same period emerging markets have significantly multiplied their value, accumulating a 245% return, albeit with a great deal of volatility.
We are not saying that this will happen again. There are probably new technologies, AI being the most obvious right now, that justify the great growth of some technology companies in the US. But diversification does allow opportunities to be captured in any market, without depending on a single region. We cannot predict whether the US will continue to lead in the coming decades, but even if it were, a more global portfolio reduces risks and maximizes opportunities.
Diversified and balanced portfolios for you
Investing in the S&P 500 index is a solid option and will always have a very important weight, especially in portfolios with high exposure to equities. However, it should not be the only option.
We often get asked, “Can I invest in the S&P 500?”
Our answer is clear: “yes, but we do not advise you to invest only in it.”
At inbestMe we believe that diversification is key, because it allows you to reduce risks without having to predict the future. The most important thing is to define your objectives and investment horizon, and from there, determine the appropriate balance between the different asset classes, mainly fixed income and variable income.
Even in an equity-dominated portfolio, it is not advisable to focus on just one index, no matter how well it has performed in recent years. In fact, its recent strong performance could be a sign that the future will not be so bright. The US market is already trading at very high multiples as we have seen above.
But rather than trying to guess the market, the best strategy is to diversify. At inbestMe we design globally diversified portfolios, in which the S&P 500 plays an important role (around 50% in the equity part), but complemented with exposure to other regions and asset classes. Even in portfolios with a high exposure to equity, we integrate small-cap companies and real estate assets, a sector that has been punished recently but with long-term potential.
Remember the old saying: don’t put all your eggs in one basket. Build a comprehensive, balanced portfolio tailored to your goals to maximize your chances of financial success.
Discover your risk profile and we will manage a portfolio tailored to you.
APPENDIX: REVIEW CRITERIA FOR COMPANIES THAT MAKE UP THE S&P 500
Companies that make up the S&P 500 are reviewed quarterly, although changes do not follow a fixed schedule and can occur at any time if a company no longer meets the index’s criteria.
In short: The larger and more heavily traded a company is, the more it influences the movements of the S&P 500.
Review and update process
- The S&P Dow Jones Indices Committee meets regularly to review the composition of the index.
- Reviews most commonly occur in March, June, September and December.
- Changes can be made at any time if a company is acquired, goes bankrupt or otherwise becomes ineligible.
Inclusion criteria
To be on the S&P 500, a company must meet certain requirements, such as:
- Be headquartered in the US
- A minimal market capitalization (currently over $14.5B approx.)
- Be profitable in its last four quarters
- Have high liquidity and trading volume.
Changes to the index are intended to reflect the market more accurately, while maintaining a balanced representation of economic sectors.
What does all this mean? Well, basically these criteria determine the management of the index, and there is no need for professional managers to manage it by charging high commissions: those who follow an index accept these inclusion criteria that ultimately determine its management.
It should be noted that in the index, companies are weighted according to their market capitalization: this means that companies within the index do not have the same weight, but their influence on the index depends on their size on the stock market.
How is capitalization calculated?
- Market capitalization: This is the total value of a company on the stock market (share price × total number of shares).
Market capitalization is adjusted for float.
- Float adjustment: Not all shares are counted, only those that are actually in circulation and can be bought and sold freely (excluding, for example, shares controlled by the government or large shareholders who do not usually sell them).
Ultimately, a company with high market capitalization and high float will have a very high weight in the index, and vice versa.
You can find out more about the S&P 500 index at S&P Global.
