Instead of doing your own analysis, you can invest in either a mutual fund or an ETF. Here, we look at the differences & similarities between the two.
This is one of the most commonly asked questions we receive, which is understandable given it’s one of the most frequently used benchmarks by investors large and small, and a constant source of comparison in the financial media.
Contrary to popular opinion, however, we don’t think the S&P 500 index is necessarily a useful yardstick for investment performance. Even more importantly, we also don’t think investors should always count on it for delivering the best long-term investment returns.
When comparing investment performance, it’s important to make useful comparisons. You’re not going to learn much comparing apples with oranges, and the same goes when investing.
Take a portfolio containing a mix of equities (shares in companies) and bonds for example. While an equity and bond portfolio will almost certainly have underperformed the S&P 500 over the long- term, that’s not a fair comparison. With hindsight your portfolio would have grown more by just investing in S&P 500 equities, but many investors don’t have the tolerance for the wild ride equities can take you on (remember the S&P 500’s 55% decline during the financial crisis?). A fair comparison would be to compare a mixed-asset portfolio with a similar mixed-asset benchmark index or peer group.
The US stock market, particularly at the larger end of the company size spectrum, has been by far the strongest performer among the world’s major stock markets during the past decade. As the S&P 500 represents the US stock market’s biggest companies, it’s been one of the best performing indexes in the world over the past ten years.
For many investors the S&P 500 therefore represents the gold standard to compare performance against. Would those investors, however, have made the same comparison during the first decade of the millennium when the S&P 500 delivered a negative return of -30% over a 10-year period? We suspect not.
Therefore, to compare investment performance against one of the strongest-performing indexes over recent years, it could be argued, is simply cherry-picking. If your portfolio only invests in large US companies, then that’s a fair benchmark. But if not, you should put comparisons with the S&P 500 out of your mind.
It’s also important to make sure you compare the performance of your investments with a benchmark that broadly matches their geographical exposure. You wouldn’t compare a Japanese fund against the UK stock market, would you?
So, if your portfolio invests in both US and international equities, as Skybound Wealth portfolios do, the most appropriate comparison is with the global, rather than US, stock market. We sometimes hear arguments that the S&P 500 outperforms international markets, so that should be the benchmark as that’s what investors could be getting. While it’s true the S&P 500 has performed much better than international markets for several years, it’s unlikely to always be that way. Investors believing the S&P 500 is a sure-fire winner could turn out to be right, but could also be in for disappointment.
Over the last five decades the S&P 500 has only outperformed the international stock market during two of them. Now of course that ratio is unlikely to hold exactly in the future – it could be better for the S&P 500 or it could be even worse. By overlooking international markets though, you’re ignoring nearly half the world’s stock market opportunities and potentially reducing your investment returns.
That’s why we favour a global approach to equities within Skybound Wealth portfolios. This means you’ll be investing in the US, and developed international and emerging markets, in broadly the same proportion as the global stock market (currently 58% US, 29% developed international, 13% emerging markets). So whether the US stock market and the S&P 500 continue to power on, or the future favours foreign markets, you’ll be invested in whatever is winning.
We Are Committed To Helping You Realise The Future You Deserve
Our investment philosophy defines how we believe investing should be done. It’s therefore the foundation of all our decision making. Every investment decision is made with clients’ interests in mind.
Past performance is not a guide to future returns. Investment in securities involves the risk of loss and the advice herein cannot be construed as a guarantee that future performance will be reflective of past returns.
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