Call me old fashioned. But I still believe in the S&P 500. This came up the other day in a couple different ways. First, I had a friend ask me if I still had faith in the S&P 500. Then I saw a provocative headline online essentially calling the same thing into question.

So I feel the need to come to its defense. And, for clarity, in this post I am using the S&P 500 as a proxy for the overall American stock market. We can nitpick if we want. But that is essentially what it is a proxy of anyway.

Why does the S&P 500 get a bad rap to start with?

It’s worth exploring this to start off.

In my mind, there are really two main reasons that people start losing faith in the US stock market. The first is then economy seems to be slipping a bit. When that happens, all of a sudden the sky is falling and the economy will never accelerate and pick up again. That is obviously not the case. But we all suffer from an immediacy effect. And when we are in a tough spot, it seems like that will last forever.

This has been happening lately given recent inflation, tariffs and threats of more tariffs, as well as the simple fact that the stock market has been in a sustained “up” market for a while. So people naturally get worried about when the next down cycle will come.

Second, investing in the US stock market via the S&P 500 is boring. Just like investing passively in anything, really. You buy your S&P 500 index fund and then essentially do nothing but rebalance it once a year. It just feels like we should be doing more to be successful. Almost like it won’t work because it doesn’t require tinkering.

However, the opposite is true. It works so well because it doesn’t require tinkering. Passive investing means lower fees ands taxes. High quality peer-reviewed literature shows that it works better than active investing. Because active investors can’t correctly time the market or pick stocks better than random luck.

Why I still believe in the S&P 500

In any case, despite this bad rap, I still believe in it. And I think you should too. Here’s why…

1. Investing in it means you are placing your bet on the overall US economy

When you invest in a single stock, you are placing a bet on that company. If it does well, you make money. If it does poorly, you lose money. Unfortunately, it is just not possible to determine ahead of time which company will do well and which will not.

Go back 20+ years and just as many “experts” were touting Enron as the hot stock to buy as there were experts telling you to buy Apple stock. As we all know, those two companies had very different trajectories.

So, if investing in a single stock is gambling, how can we invest?

Well, this is where the S&P 500 and true index funds come into play. When you invest in all or nearly all of the stocks in the US stock market, what are you betting on? Because, to be sure, you are still “betting” to a degree. No investment has a guaranteed return.

And yes, you can say what you will about the current state of things in America, which is not great, but the American economy has stood the test of time. And even if it doesn’t, well more on that later…

2. We invest for the long term

Further, when you invest in the S&P 500 passively through index funds, you are betting on the overall US economy.

But not at any one point in time. Because trying to time when the market will be high and when it will be low has again been proven to be a fool’s errand.

But instead we are investing over the long run. And that has been a very safe and reliable bet over the long term. If, at any point in the history of the US stock market, you invested in the overall market for 20 years or so, you would have made a lot of money.

The risk of being wrong in the short term doesn’t really matter then…and finally…

3. The worst case alternative is devastating, and being wrong in that case likely doesn’t matter financially

Ok…so, if we use the analogy that investing in the S&P 500 is like placing a bet on the US economy, we need to look at the worst case scenario possibility of losing that bet. Even if it historically is not very likely.

Let’s imagine for a moment that the whole US economy collapses. Those of us who invest in the US stock market would lose a lot of money. But the other ramifications of this happening would be so much more massive.

First, the entire world economy would likely have to fall apart either as a prelude to or a result of the US economy collapsing. Society at large would also cease to function at least as we know if today. It’s very likely the money in our investment accounts (akin to 1’s and 0’s on a computer server) would hold little value in a world such as this anyway.

In that sense, we have very little to lose by placing this best and investing in the S&P 500, aka the US economy. If things continue as they have, we will reach financial freedom. If everything implodes, our nest egg will be the least of our worries.

3 investment strategies in case I am wrong about the S&P 500

But even with this being said, and my staunch belief, my written financial plan calls for me to largely do 3 things in case I am wrong and returns from the S&P 500 are not what I expect…

1. Investing in bonds

This sounds ho-hum, but investing in bonds is a great hedge against stock investing. Remember, a bond is basically an IOU from the government, a corporation, or other entity. You give them money and they promise you to give that amount of money back with a fixed interest rate at a later date (called the maturity of the bond, like 5 years, 7 years, or whatever).

In general, bonds are lower risk than stocks because you “buy” a largely fixed interest rate that you theoretically are guaranteed to receive if you hold the bond to maturity. Since it is lower risk and more stable, bonds generally have a lower return. But, stability and decreased risk play an important role in any investor’s portfolio.

Now, there are tons of different types of bonds. Treasury bonds, G bonds, inflation linked bonds like I-bonds or TIPS, corporate bonds, junk bonds, and so on. Within this range of bonds, some are riskier than others. 

Junk bonds are bonds from companies that have a high risk of default. Thus, this risk carries a higher potential return. Meanwhile, the government is very low risk to default so risk and returns are lower with things like treasury bonds.

For the purposes of this post, let’s just say we are discussing generic U.S. government bonds to keep things simple.

So, by investing a proportion of my portfolio in bonds, in my case 10% (here is a guide to determine what your bond asset allocation should be), I am hedging against poor returns from the S&P 500. Bonds and stocks typically do not correlate. And despite their lower expected returns, there have been years where bonds outperformed stocks.

2. Adding a small value tilt to my portfolio

My portfolio largely reflects a 2 fund for life investment strategy as popularized by Paul Merriman. In it, I invest mainly in a target date fund (which includes large total market index funds like an S&P 500 fund as well as bonds) and a small, value index fund.

This create a tilt towards small, value stocks in my portfolio. So why do I do this and why is this protection against poor performance for the S&P 500?

A quick refresher

Companies are arbitrarily divided in two broad ways, based on size and based on stock price to earnings ratio. Put simply, stocks of big companies are considered large cap(italization). Stocks of small companies are small cap.

Stocks of companies with a higher stock price to earnings (P/E) ratio are called growth stocks. These tend to be stocks of established companies where the value of a stock share price seems equated or inflated compared to the earnings of the company.

In contract, value stocks are those of companies with a lower P/E ratio. These are stocks that may be undervalued and have a lot of room to rise.

Over the long term, small cap stocks and value stocks historically outperform large cap and growth stocks. And a small value index fund is an index fund with small value company stocks. These include a lot of companies that you won’t find in the S&P 500. So, again, I am hedging that these returns will not correlate completely with the overall market. And even if the overall market does poorly over some long time period, this tilt will increase my returns anyway.

3. I invest in real estate

Selenid and I invest in cash-flowing rental properties. (This is a guide for any doctor looking to invest in real estate.) At this time, we have 8 such properties that cash flow after expenses about $10,000 monthly for us.

This is the biggest thing we do in our portfolio in case we are wrong about the S&P 500 and long term returns from it are not enough to carry us to financial freedom.

Real estate and the stock market do not correlate. Further, real estate involves real hard assets in addition to cash flow. And cash is king. Especially when markets and the economy are down, cash rules. Let’s even say that the worst case scenario happens and the whole US economy collapses, we still have hard assets and places for people to live. Even in a barter system this is worth something.

Real estate offers a lot of advantages in that way.

What should you do?

I think this discussion underscores a few things…

1. Sometimes in personal finance and investing, we get too caught up in the weeds. Investing successfully is really pretty simple: follow these 7 steps including saving 20% of your gross income and investing it passively. No need to make things more complicated. Even if it seems too simple…
2. We always want to hedge against the chance we are wrong, even if it is not a great chance. Doing so doesn’t need to be extra risky or difficult either. In this case, some small portfolio adjustments and possibly a small allocation to a safe and proven strategy like real estate investing is all that is needed.
3. It is time in the market, not timing the market that makes you successful. Even though a down market feels everlasting in the moment, it is not. Remember that we are investing for the long term. The short term does not bother us. If it does, then your bond allocation needs to be higher.
4. We all need to have a written personal financial plan (like mine here) to guide us and keep our course steady on the road to financial freedom!

I hope this review helped! Remember, if you are looking for an all-in-one guide to your personal financial well-being, check out my best-selling book, Money Matters in Medicine! Or, if a hands-on approach works better for you, check out my course, Graduating to Success!

What do you think? Do you believe in the S&P 500? Why or why not? What do you do in case you are wrong either way? Let me know in the comments below!