Why You Shouldn’t Just Invest in the S&P 500

Investors often think they have a diversified portfolio when, actually, they don’t.

We know this because our clients sometimes ask us things like, “Why don’t I just invest in the S&P 500®?” They seem to believe investing in an index that gives them exposure to a broad selection of assets means they have a diversified portfolio.

But that’s only one of the dimensions of diversification. A good portfolio is actually diversified across three different dimensions: assets, markets and time.


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5 Responses to “Why You Shouldn’t Just Invest in the S&P 500”

  1. David Raccah July 3, 2013 at 8:47 am #

    Nice post – but you are missing one more VERY important part – “asset location”! More than 15% of most people’s money is lost in the market because of poor tax management. Sure tax harvesting is nice, but a better way is to move all assets that are taxed as wages (bonds, commodities, GLD, and others) into a tax deferred or tax free vehicle (IRA, 401K, ROTH IRA).


    • Andy Rachleff July 5, 2013 at 10:08 am #

      We assumed an investor applies asset location because that’s what we do at Wealthfront. Stay tuned for an interesting blog post on the subject :-) As you will see from the post asset location does not add nearly as much value to your after tax returns as tax loss harvesting. We will present the dat to show why.

      • David Raccah July 10, 2013 at 5:18 pm #

        Cool! I look forward to that post. Not sure how one gets around the taxes at the level of wages (bonds and the such) in a taxable account with tax loss harvesting alone? Either way, as dividends are given you must pay full tax on that and tax loss harvesting does not count against it – other than 3K a year. Again, looking forward to the data!


  2. Roger Balser July 12, 2013 at 5:16 am #

    Andy I am curious how did your concept of investing in a diversified portfolio of broad asset classes work in 2008?

    • Andy Rachleff July 12, 2013 at 9:15 am #

      Better than the S&P 500 on a nominal basis and far better on a risk adjusted basis. It’s easy to see on our site after you answer our 10 risk assessment questions. We enable you to see how our proposed portfolio would have performed against 7 indexes and inflation

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