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Does your investment portfolio lack variety? Believe it or not, that’s OK in some cases. Read on to learn more.
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A friend of mine who has been investing for many years recently asked me to look at her portfolio and offer up some suggestions. When I took a look at her holdings, I saw that the bulk of her portfolio was in an S&P 500 ETF.
“I guess I’m a boring investor,” was her response after I pointed that out. But I was quick to reassure her that in this case, a lack of variety wasn’t necessarily hurting her.
When you diversify the easy way
The problem with being a “boring” investor who doesn’t branch out into different assets is that a lack of diversification within your portfolio could limit its growth and potentially subject you to losses during periods of stock market volatility. That’s why, for example, you wouldn’t just want to buy shares of Apple, or Amazon, or any other individual company and call it a day.
Imagine you own $10,000 worth of Apple stock and shares fall 20% following an earnings report. Suddenly, your portfolio value is going to plunge to $8,000, just like that.
But the one time it is OK to hold just a single investment is when you’re buying S&P 500 ETFs. Basically, when you go this route, you’re investing your money in the 500 largest publicly traded companies in the market today. Only you’re not going out and buying shares of 500 different companies. Rather, you’re buying shares of a single fund that allows you to invest in that index.
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When I saw that my friend’s primary investment was an S&P 500 ETF, I didn’t worry the way I would’ve had she had most of her assets in a single stock. In fact, because I know that my friend isn’t interested in researching stocks and following different companies, I told her not to change a thing.
How much wealth can you grow with S&P 500 ETFs?
Over the past 50 years, the S&P 500’s average annual return has been 10%. That accounts for years when the index did fabulously and years when it lost value.
So let’s say you’re 40 years old and have $15,000 in an S&P 500 ETF. If you leave that investment alone until age 70 and it generates an average annual return of 10%, you’ll end up with close to $262,000. That’s almost 18 times your starting balance.
Normally, I recommend assembling a diverse mix of stocks when you’re investing on a long-term basis. But I’m also a big fan of keeping things simple on the investing front when that’s what suits you best.
If you’re not someone who’s particularly interested in following the stock market, then investing in S&P 500 ETFs could be a good way to go. And while you might think that approach is pretty boring, know this: Once you’re retired and living largely off of your savings, you’re likely to care much more about your portfolio balance and less so about what you did to get there.
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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Maurie Backman has positions in Amazon and Apple. The Motley Fool has positions in and recommends Amazon and Apple. The Motley Fool has a disclosure policy.
