Why the S&P 500 Isn’t a Complete Portfolio
By Laurie Allen, CFP® | LA Wealth Management
As a financial advisor working with clients for over 15 years, I can't tell you how many people visit me in the office, tell me they're in a diversified portfolio and open up their statement only to show several funds that are all basically the S&P 500 in varying forms.
For many investors, the S&P 500 is often viewed as the gold standard. And in some ways, it is—owning the index is certainly more diversified than concentrating in just a handful of big names like the FAANG stocks or the “Magnificent Seven.” With 500 of the largest publicly traded companies in the U.S., it has delivered strong returns over time. But while it’s a powerful tool, the S&P 500 isn’t a complete investment strategy on its own. Here are some important reasons why a diversified portfolio needs more than just one index fund.
1. It’s U.S.-Only
The S&P 500 tracks American companies exclusively. That means you’re missing out on opportunities in international developed markets (Europe, Japan, Australia) and emerging markets (China, India, Brazil). Think companies like Nestlé, Samsung Electronics or
Toyota Motor Corp. Global diversification helps reduce risk if the U.S. market struggles, and it allows you to participate in growth stories abroad.
2. It’s Large-Cap Concentrated
The S&P 500 is heavily tilted toward large-cap companies—the household names like Apple, Microsoft, and Amazon. While these companies are important, history shows that small-cap and mid-cap stocks can outperform over long time periods. By ignoring them, you lose out on an entire segment of potential growth.
3. Sector Imbalances
At times, the S&P 500 becomes overweight in certain sectors. For example, today’s index is dominated by technology and communication companies representing approx 35% of the index. If that sector experiences a downturn, your portfolio suffers disproportionately. A good example of this was during the 08-09 financial crisis the S&P 500 was made up of approx A balanced portfolio should include exposure across sectors such as healthcare, financials, industrials, and energy.
4. No Fixed Income or Bonds
Equities like the S&P 500 can be volatile. A complete portfolio should include bonds or fixed-income investments to provide stability, preserve capital, and generate steady income. Bonds often act as a counterweight to stocks during market downturns.
5. No Alternatives or Real Assets
The S&P 500 doesn’t give you access to real estate, commodities, or alternative strategies that can provide protection against inflation and add another layer of diversification. These asset classes can help smooth out returns when stocks are turbulent.
6. Valuation Risks
When the S&P 500 trades at high valuations, investors relying solely on it could face significant drawdowns. A diversified portfolio can help manage this risk by spreading exposure across different asset classes, geographies, and styles (like value vs. growth).
7. Your Personal Goals Matter More Than an Index
Most importantly, the S&P 500 has no idea about your retirement goals, income needs, or risk tolerance. A complete portfolio should reflect your life, not just a stock index. That might mean holding safer assets if you’re nearing retirement or emphasizing growth if you’re early in your career.
The Bottom Line
The S&P 500 can be a great foundation for long-term investing, but it’s not the whole house. A complete portfolio includes a mix of asset classes, geographies, and strategies tailored to your financial goals. As advisors, our job is to help you build that balance—so your investments aren’t just chasing returns, but working to provide stability, growth, and peace of mind.
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Disclosures:
The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy.