The S&P 500 is one of the most widely recognized stock indexes, with many people referring to it as “the market.” In fact, many investors I come across (including my own grandfather) believe that just investing in the S&P 500 is the best way to reach their financial goals. In this article, we will be reviewing the origin of the S&P 500 superiority myth, risks associated with investing solely in this index, and diversification benefits.
Where The Myth Originated
Warren Buffett is widely known as an exceptional investor, generating almost 20% annually compared with the S&P 500’s 10.4% between 1965 and 2024 during his tenure at Berkshire Hathaway. In a 2013 letter to his company, Buffett explained that he thinks a portfolio with 90% tracking the S&P 500 index and 10% in short-term government bonds will fit most investors’ needs, compared with picking individual stocks as he was so successful at during his career.
Many people have taken this to mean that the S&P 500 is a superior way to invest, as opposed to a better way to invest than stock picking. I agree with his assessment that it is better to widely diversify than pick individual stocks. However, investing solely in the S&P 500 may result in missed opportunities to boost returns.
Risks
Investors also often tell me that they view the S&P 500 as a low-risk place to park their money. In reality, investing 90-100% of your portfolio in the S&P 500 would be considered an aggressive strategy because it exposes investors to several significant risk factors.
Concentration Risks
The S&P 500 consists of the largest public stocks in the United States. However, the index isn’t equally distributed between all 500 companies. In fact, concentration in the top 10 largest companies has been rising. As of 2025, that percentage concentration has risen to 40%.
Meanwhile, indexes like the Russell 2000 (the 2000 smallest companies out of the 3000 largest U.S. companies) and the MSCI All Country World Index (2,500 large and mid-size companies across the globe, do not present these kinds of concentration risks.
Valuation Risk
Nobel prize winning academic, Robert Shiller, is known for creating one of the best valuation metrics for the S&P 500. He founded the Cyclically Adjusted PE Ratio (CAPE), which compares current price of companies to average inflation-adjusted earnings from the prior 10 years.
In this, a high number is considered potentially overvalued and at risk of decline and a low number is considered undervalued and an opportunity for a potentially large gain.
The highest overvaluation in American history was in December 1999, at the peak of the internet bubble. The following 10 years, resulted in what economists refer to as The Lost Decade, where S&P 500 had negative total returns from January 2000 to December 2009. The CAPE Ratio at that time was 44.19.
As of March 2026, the S&P 500’s CAPE Ratio is at 36.53, which is 19.18 above its average of 17.35.
Geopolitical Risk
There are often geopolitical risks with short-term impacts on returns in the S&P 500. Here are some things we are experiencing today:
- Conflict in the Middle East leading to surging oil prices
- Inflationary pressure on businesses due to rising operation costs
- Disruptions to normal supply chains
- Conflict between Russia and Ukraine creating instability in energy and commodity markets
Interest Rate And Inflation Risk
The Federal Reserve has significant power over interest rates and an inflation target. Aggressive shifts in Federal Reserve policy can lead to significant shifts in the stock and bond markets, as seen most recently in 2022, with the S&P 500 falling over 19% and the Morningstar U.S. Core Bond Index losing 12.9%.
Benefits Of Diversification
During the Lost Decade (Jan 2000-Dec 2009), we reviewed that the S&P 500 had negative returns. This wasn’t true in every area of the market. Smaller company returns averaged 7.94% per year, international cheaper companies averaged 7.07% per year, and Emerging Markets averaged 10.89% per year during that period.
Small cap premium
According to Dimensional Funds research as of September 2025, the S&P 500 has done better than smaller company stocks in very recent years. Average annual returns for the last 10 years were 15.3% in the S&P compared with 11.01% for smaller stocks. However, average returns for smaller companies since 1927 were 1.61% higher than for larger companies. Over that nearly 100-year period, the small company portfolio would be almost five times larger than the S&P 500 portfolio.
Value Premium
Nobel prize winner, Eugene Fama, found after vigorous academic research that companies with a low price compared to their book value (value companies) outperformed companies with a high price compared to their book value (growth companies). This percentage of outperformance was 4.4% from 1927 to 2022. This means you’d have nearly 60 times more money in a value portfolio than a growth portfolio over those 95 years.
International Diversification
Anything you add to your portfolio with a correlation less than 1 adds diversification benefits to your portfolio. Broad developed market indexes and global indexes have the highest correlation with U.S. markets whereas Emerging Markets have some of the lowest correlations and can add the greatest diversification benefits.
According to the J.P. Morgan Guide to the markets Q4 2025, emerging markets returned 34.4% in 2025, developed outside the U.S. returned 31.9%, and the S&P returned 17.9%. They also found that the percentage of world stock in the U.S. is 64%, giving large international investing opportunities with the remaining 36%.
Consider Your Goals
Before investing in a portfolio of 100% stocks tracking the S&P 500, consider your actual goals and appetite for risk. If you have a shorter-term goal or are sensitive to major fluctuations, consider assessing your tolerance for risk and balancing your portfolio accordingly. If you need support with understanding or tracking your goals, understanding your risk tolerance, or selecting an optimal portfolio, consider speaking with a qualified financial professional.
Conclusion
Investing solely in the S&P 500 can provide broad U.S. market exposure but carries risks like concentration, valuation, and limited diversification. Exploring small caps, value stocks, and international markets can enhance returns and reduce risk. Align your portfolio with your financial goals and risk tolerance. Diversification is key to long-term success, and consulting a financial professional can help optimize your investment strategy.
The subject matter discussed in this article is for informational purposes only. It is not intended and should not be relied upon as investment or financial advice and does not constitute an offer, recommendation, or solicitation. Securities offered through Equitable Advisors, LLC (NY, NY 212-314-4600), member FINRA, SIPC (Equitable Financial Advisors in MI & TN) and offers annuity and insurance products through Equitable Network, LLC, which conducts business in California as Equitable Network Insurance Agency of California, LLC). Financial Professionals may transact business and/or respond to inquiries only in state(s) in which they are properly qualified. Any compensation that Ms. Jones may receive for the publication of this article is earned separate from, and entirely outside of her capacities with, Equitable Advisors, LLC and Equitable Network, LLC (Equitable Network Insurance Agency of California, LLC). AGE-8853225.1 (4/26)(exp. 4/30)