Should You Invest in a Total Stock Index Fund or S&P 500 Index Fund? (2024)

FAQs

Should You Invest in a Total Stock Index Fund or S&P 500 Index Fund? ›

Most investors don't need to hold both a total stock market index fund and an S&P 500. The key to determining which is better for your portfolio is to look at your other holdings. For example, if you already have small- and mid-cap funds, you may want the more concentrated large-cap exposure of the S&P 500.

Total stock market index funds are only slightly more diversified than S&P 500 index funds. Since both types of indexes are heavily weighted toward large-cap stocks, the performance of the two funds is highly correlated (similar).

Bottom line. S&P 500 index funds are some of the best investments for investors of all skill levels, but they can be especially beneficial for newer investors, who can enjoy solid returns without needing extensive expertise. Investors have a variety of cheap options to attain those tasty returns.

Investing in an S&P 500 fund can instantly diversify your portfolio and is generally considered less risky than purchasing individual stocks directly. Because S&P 500 index funds or ETFs track the performance of the S&P 500, when that index does well, your investment will, too. (The opposite is also true, of course.)

Some index funds provide exposure to thousands of securities in a single fund, which helps lower your overall risk through broad diversification. By investing in several index funds tracking different indexes you can built a portfolio that matches your desired asset allocation.

One of the limitations of the S&P and other market-cap-weighted indexes occurs when stocks in the index become overvalued. They rise higher than their fundamentals warrant. The stock typically inflates the overall value or price of the index if it has a heavy weighting in the index while being overvalued.

Over the past decade, you would have done even better, as the S&P 500 posted an average annual return of a whopping 12.68%. Here's how much your account balance would be now if you were invested over the past 10 years: $1,000 would grow to $3,300.

The greater a portfolio's exposure to the S&P 500 index, the more the ups and downs of that index will affect its balance. That is why experts generally recommend a 60/40 split between stocks and bonds. That may be extended to 70/30 or even 80/20 if an investor's time horizon allows for more risk.

Investing only in the S&P 500 does not provide the broad diversification that minimizes risk. Economic downturns and bear markets can still deliver large losses. The past performance of the S&P 500 is not a guarantee of future performance (yeap, and we'll get back to that!)

Is it better to buy stocks or index funds? ›

Lower risk: Because they're diversified, investing in an index fund is lower risk than owning a few individual stocks. That doesn't mean you can't lose money or that they're as safe as a CD, for example, but the index will usually fluctuate a lot less than an individual stock.

"Index funds are a low-cost way to track a specific group of investments, which can be more broadly diversified than individual stocks and simpler to buy than each of the individual holdings within the index," she said.

A commonly cited rule of thumb is to own between 10 and 20 mutual funds, but the actual number will vary depending on your individual circ*mstances. Too many funds can lead to unnecessary over-diversification and overlap. There's really no point in owning, say, two index funds that invest in the same index.

How many S&P 500 index funds do I need? S&P 500 index funds will be nearly identical to one another in terms of their performance and their holdings, or the particular stocks held within the fund. Investing in multiple S&P 500 index funds will not necessarily further diversify your portfolio.

Also, research suggests that when it comes to the S&P 500's historical returns, there's never been a bad time to buy as long as you're a long-term investor.

The Total Stock Market fund tracks the CRSP US Total Market Index, which captures practically every investable U.S. stock in the market. The S&P 500 ETF tracks the S&P 500, which is a collection of about 500 of the largest U.S. companies that have been consistently profitable for at least a year.

As an equities index tracking the leading US companies, many people follow the ups and downs of the Standard & Poor's 500 as a benchmark of how the broader stock market performs at any given time. As such, the S&P 500 tends to be suitable as an investment for investors seeking broad exposure to the US economy.

The greater a portfolio's exposure to the S&P 500 index, the more the ups and downs of that index will affect its balance. That is why experts generally recommend a 60/40 split between stocks and bonds. That may be extended to 70/30 or even 80/20 if an investor's time horizon allows for more risk.

Commonly called the S&P 500, it's one of the most popular benchmarks of the overall U.S. stock market performance. Everybody tries to beat it, but few succeed.