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Most private-sector employers no longer offer pensions like in the past.
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The S&P 500 provides instant diversification across 500 large companies with a strong return history.
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Tech stocks dominate the S&P 500 by market cap and can drive significant losses during sector downturns.
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It used to be a common thing for employers to offer pensions. This really took the pressure off of retirement savings for workers. You could show up to your job every day, stay with the same company for 40 years, and collect a pension in retirement without having to worry about money.
Nowadays, things are very different. Most private-sector employers don’t offer a pension like companies did in the past.
If you’re not among the lucky few who have one, or a government worker, then you’re probably tasked with saving for retirement on your own. And that means having to figure out how to invest your money for long-term success.
Some financial experts will tell you that you can retire comfortably if you put all of your money into the S&P 500. In fact, investing giant Warren Buffett has long said that for the average saver, buying and holding shares of an S&P 500 index fund or ETF is a smart move.
But can you really retire on the S&P 500 alone? You can, but you may not want to.
There are several benefits to putting your money into the S&P 500. First, you get instant diversification.
The S&P 500 gives you exposure to the 500 largest publicly traded companies today. These are established businesses across a range of industries.
Secondly, the S&P 500 has a long history of delivering solid returns. If you buy shares of different companies of your choosing, you may end up with smaller returns if those businesses underperform.
Finally, investing in the S&P 500 is simple. You simply buy shares of an index fund or ETF, sit back, and let your portfolio do all the work. There’s no need to rebalance every other quarter or keep tabs on various companies’ performance.
On the other hand, there are a few disadvantages of only investing in the S&P 500 for retirement. While you might see that your portfolio’s performance matches that of the broad market, you aren’t going to beat the market. You could end up with stronger returns with a portfolio of hand-picked stocks instead.
Also, even though the S&P 500 index consists of several hundred large businesses, the companies with the largest market capitalization influence its performance most heavily. So while an S&P 500 index fund or ETF does offer diversification, it may not offer the amount of protection from sector-specific volatility as you’d like.
For example, tech stocks make up a large portion of the S&P 500 by market cap. So if things go awry in the tech industry, you could see pretty sizable losses in your portfolio, despite it being diversified.
Based on the S&P 500’s historic returns, it’s possible to amass a lot of money by investing in the index alone provided you give yourself a long savings window and contribute to a retirement account consistently. But you may want to branch out beyond the S&P 500 for added protection and diversification.
If the idea of choosing individual stocks for your retirement portfolio scares you, don’t do it alone. Instead, work with a qualified financial advisor to figure out a good mix of stocks. If you put a portion of your portfolio into the S&P 500 but supplement with other assets, you may find that you get the best of all worlds.
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