Trevor Williams | DigitalVision | Getty ImagesThe S&P 500 index closed at a new all-time high on Wednesday amid a federal government shutdown.
It rose to a new intraday high early Thursday.Prior to that, the index — which is focused on large-cap U.S.
equities — had risen almost 90% since the equity bull market began three years ago, thanks in large part to new AI developments, Morgan Stanley Wealth Management noted in Sept.
29 re.Nevertheless, experts say it may be time to reconsider the set-it-and-forget-it S&P 500-focused strategy, famously touted by legendary investor Warren Buffett."The S&P 500 is broken," said Michael DeMassa, who is a certified financial planner and chartered financial analyst, and the founder of Forza Wealth Management in Sarasota, Florida.Many investors assume in the S&P 500 index — through ETF ticker SPY, VOO or IVV — is synonymous with diversification, DeMassa said.watch now9:2109:21Year-end rally or a reversal ahead?Halftime ReportYet that sense of safety is an illusion, he said, since the market capitalization-weighted index means companies with bigger allocations may drag down the fund if their performance suffers.
Or the index's heavy concentration in the nology sector may mpt volatility to ripple through the entire index, DeMassa said.If you can invest in the S&P 500 index for a long time, you will bably do well, said Deva Panambur, a CFP and CFA, and founder of Sarsi LLC in West New York, New Jersey.But occasionally the index suffers long periods of underperformance, he said.
For example, between 2000 and 2008, the S&P 500 was down by more than 30%.Wall Street forecasts generally see the index continuing to go up for the foreseeable future.Still, experts say it's best to choose a broader investment mix in case there is a pullback.How to best diversify your investments nowFor investors who are seeking a simple apach, it may make sense to opt for a total market index fund instead of an S&P 500 index fund, according to Brendan McCann, associate manager re analyst at Morningstar.Un S&P 500 index funds, total market funds also vide exposure to small- and mid-cap stocks in addition to large-cap companies.Alternatively, investors may opt to broaden the exposure an S&P 500 index fund already vides in their portfolio.
One example may be a fund that tracks a total market index that excludes S&P 500 index stocks, or the Vanguard Ext Market ETF, according to McCann.More from Financial Advisor Playbook:Here's a look at other stories affecting the financial advisor .He invented the 4% rule — why he calls inflation retirees’ ‘greatest enemy’Treasury released early list for ‘no tax on tips’ deduction, but some jobs won’t qualifyThere’s a ‘golden opportunity’ to pay 0% capital gains under Trump’s tax billThe trick with that strategy is to buy the funds in the right portion, McCann said.For investors who don't want to worry changing their asset allocations over time, buying a total market index fund may be a better apach, according to McCann.
Switching to a total market index fund strategy may be particularly attractive for investors who don't have to worry the tax implications of changing funds, such as 401(k) investors, he said.Other experts have opting for equal-weighted S&P 500 index funds, which hold an equal portion of each stock.
However, the downside with those strategies is that there may be more transaction costs when rebalancing, McCann said.When the S&P 500's returns were down between 2002 and 2009, areas small cap, value, international and even bonds performed better than stocks, Panambur said.Today, the portfolios he creates for clients have allocations to those areas."When I look at the overall allocation, my goal is to make sure it's more balanced than the S&P 500," Panambur said.The set-it-and-forget-it S&P 500 strategy was int to vide broad market exposure.
"That's no longer the case," DeMassa said.As investors seek to diversify, it is important to pay attention to the holdings of each of the funds they own, he said.If a portfolio has funds tracking both the S&P 500 and Vanguard Growth indexes, for example, the exposure to large-cap nology names will be increased rather than limited, he said.