Warren Buffett’s S&P 500 wager paid off. Some consultants say it could be time to diversify

In 2007, Warren Buffett made a $1 million wager that he might outperform hedge fund managers over the course of a decade by investing in an S&P 500 index fund.

In 2017, he gained.

Some particular person buyers are making comparable bets on the S&P 500 with their cash, whether or not it’s by means of exchange-traded funds or mutual funds.

True to its title, the S&P 500 index contains 500 giant U.S. firms. The index is market cap-weighted, with every listed firm’s weighting primarily based on the entire worth of all its excellent shares. The index is rebalanced quarterly.

The three greatest ETFs observe the S&P 500 index, in line with Morningstar. They’re the SPDR S&P 500 ETF Belief, which trades below the ticker SPY; iShares Core S&P 500 ETF, with ticker IVV; and Vanguard S&P 500 ETF, which trades as VOO. Collectively, these funds make up virtually 17% of the U.S. ETF market, in line with Morningstar.

In 2024, VOO has been the chief of these three funds in attracting new cash, with $71 billion in internet inflows over the primary 9 months, in line with Morningstar, beating the file SPY set in 2023 by $20 billion.

The S&P 500 index has continued to make headlines for new all-time highs in 2024. 12 months thus far, the index is up round 20% as of Oct. 8. Over the previous 12 months, it has climbed 33%.

That efficiency has bested some consultants’ predictions for the index heading into this yr, owing partially to a stronger U.S. financial system than had been anticipated.

“That elusive recession everybody was looking for never materialized,” mentioned Larry Adam, chief funding officer at Raymond James.

Now, the St. Petersburg, Florida-based agency is predicting a mushy touchdown for the U.S. financial system. But the run-up in shares is probably not as robust.

“I think you’re going to see more muted performance — still upward, but more muted,” Adam mentioned.

Traditionally, from the beginning of October by means of Election Day, the market tends to be down, on common, by about 1.5% or so, he mentioned.

“The reason for that is the market doesn’t like uncertainty,” Adam mentioned.

The excellent news is the market tends to recoup these losses and transfer increased, he mentioned.

Goldman Sachs simply raised its S&P 500 index forecast for 2024 to six,000 up from 5,600 to replicate anticipated earnings development. Tom Lee, Fundstrat International Advisors managing accomplice and head of analysis, additionally not too long ago advised CNBC he is calling for a goal of 6,000 for the S&P 500 by year-end.

Investing within the S&P 500 index is a well-liked technique.

“There are reasons why it works so well that will never change,” mentioned Bryan Armour, director of passive methods analysis at Morningstar.

Among the many benefits: It is low price, it captures a big portion of the alternatives accessible to energetic managers and it is “hard to beat in the long run,” he mentioned.

“In general, I would say the S&P 500 is better, more well diversified than most investment strategies,” Armour mentioned.

That may will let you take a set-it-and-forget-it strategy and keep away from attempting to time the market, he mentioned.

Nonetheless, there are particular dangers that include completely investing in an S&P 500 index fund on the fairness facet of a portfolio.

“The S&P 500 has been the absolute best thing [investors] could have been doing the past seven or eight years,” mentioned Sean Williams, an authorized monetary planner and principal at Cadence Wealth Companions in Harmony, North Carolina.

“There’s a lot of people who have that mentality of, ‘Why would I do anything differently?'” he mentioned.

Usually, it isn’t a good suggestion to have all the things in anybody place, even whether it is large U.S. firms which have carried out very properly up to now decade, Williams mentioned.

It all the time helps to have publicity to different areas, he mentioned, corresponding to worldwide, small- and mid-cap firms, and actual property, for instance.

Investing in an S&P 500 index technique comes with focus danger. For instance, info know-how includes 31.7% of the index, with firms together with Apple, Microsoft, Nvidia and Broadcom.

To mitigate that danger, buyers might contemplate transferring to a complete market portfolio just like the Vanguard Whole Inventory Market ETF, which trades below the ticker image VTI, which may present much less focus on the high of the portfolio, Armour mentioned.

Moreover, to get broader publicity, buyers may additionally contemplate shopping for a small worth ETF, an space that Morningstar analysts at present assume is “pretty significantly undervalued,” Armour mentioned.