2 Reasons Why You NEED To Diversify Away From S&P500!
Updated: Aug 15
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Let’s talk about the S&P 500 and why you need to diversify away from it instead of putting all your investment in that single index given its popularity, especially among newer investors.
For those who are not familiar with the S&P500, it is a popular index that allows investors to invest in the top 500 companies in the United States.
If you are currently invested or thinking of investing only in the S&P500. Here are two reasons why you should diversify away from it.
The first reason deals with the concentration risk that the index has.
The S&P500 is heavily concentrated in the United States market and it is also heavily weighed towards certain sectors such as technology and healthcare.
While being concentrated does have its merits, in the case of having a broadly diversified portfolio exposure, the S&P 500 should not have been the only investment that you have.
The second reason deals with the rich valuation that often comes along with the index itself.
While the S&P 500 has delivered strong returns historically, it is often more richly valued than other emerging markets despite having a lower growth rate potential.
For example, emerging markets like Asia have higher GDP growth rates than the US and are trading at lower price-to-earnings ratios.
This is largely due to the US’s perception of being the “safe haven” for investors and while this had worked well in the past, things are going to be very different in the future
Read more: 2 Reasons Why You Need To Invest In Asia Today!
This discrepancy suggests that investing in emerging markets may offer a better opportunity for growth at a more attractive valuation.
In conclusion, diversification is essential to managing risk and taking advantage of opportunities in different markets and asset classes. While the S&P 500 has delivered strong returns historically, investing solely in the index can expose investors to lower returns and higher risk.
By diversifying your portfolio, you can reduce your risk and potentially generate higher returns over the long term at potentially a lower risk due to the sustainability of economic growth trends in emerging countries.
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Daniel is a Licensed Independent Financial Consultant with MAS and a Certified Financial Planner (CFP®).
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This article is meant to be the opinion of the author
This article is for information purposes only
This article should not be seen as financial advice
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