"One trick pony" strategy? Buffett's strategy is hard to beat

In 2007, Buffett made a $1 million bet that by investing in the S&P 500 index fund, he could outperform hedge fund managers over 10 years. In 2017, he won.

Some individual investors are making similar bets with their funds on the S&P 500 index, whether through exchange-traded funds (ETFs) or mutual funds.

As the name suggests, the S&P 500 index includes 500 large American companies. The index is market-cap weighted, with the weight of each listed company based on the total value of all its outstanding shares. The index is rebalanced quarterly.

According to Morningstar data, the three ETFs that track the S&P 500 index - the S&P 500 ETF Trust (SPY), iShares Core S&P 500 ETF (IVV), and Vanguard S&P 500 ETF (VOO) - together account for nearly 17% of the U.S. ETF market.

Data shows that in 2024, VOO has been the leader in attracting new funds among these three funds, with a net inflow of $71 billion in the first nine months, surpassing SPY's record high of $20 billion in 2023.

Could the Future Performance of U.S. Stock Indexes be "Lackluster"?

Headlines about the S&P 500 index hitting historic highs in 2024 have been frequent. As of October 8th this year, the index has risen by about 20%. Over the past 12 months, it has risen by 33%.

This performance has exceeded the expectations of some experts, partly due to the stronger-than-expected U.S. economy.

"The elusive recession that everyone was looking for never materialized," said Larry Adam, Chief Investment Officer at Raymond James.

Now, the Florida-based company predicts a soft landing for the U.S. economy. However, the stock market's rise may not continue to be as strong.

Adam said, "I think you will see a more moderate performance in the market - still rising, but at a slower pace."

He said, historically, from early October to Election Day, the market tends to average a decline of about 1.5%. "The reason is that the market doesn't like uncertainty," Adam added, but "the good news is that the market often recovers these losses and resumes its upward trend."

Goldman Sachs has just raised its 2024 target for the S&P 500 index from 5600 to 6000 to reflect expected earnings growth. Tom Lee, Managing Partner and Head of Research at Fundstrat Global Advisors, also recently told CNBC that he expects the S&P 500 index to reach 6000 points by the end of the year.

Investing in the S&P 500 Index "Difficult to Beat in the Long Run"

Investing in the S&P 500 index is a popular strategy Morningstar's passive strategy research director Bryan Armour said, "There are several reasons why this strategy is so effective and will never change."

Its advantages include: low cost, capturing most of the opportunities that active fund managers can use, and "it is difficult to beat in the long run." "Overall, I would say that investing in the S&P 500 index is better and more diversified than most investment strategies," Armour said.

He said that this allows you to take a set-it-and-forget-it approach, avoiding trying to time the market.

However, there are certain risks in investing only in S&P 500 index funds in the stock portion of a portfolio.

"In the past seven to eight years, investing in the S&P 500 index has been absolutely the best thing (investors) can do," said Sean Williams, registered financial planner and head of Cadence Wealth Partners in Concord, North Carolina, "Many people also have the mindset of 'why should I do anything different?'."

Williams said that in general, putting all your eggs in one basket is not a good idea, even for the very well-performing large U.S. companies over the past decade. Diversifying into other areas is always helpful, such as international assets, small and mid-cap companies, and real estate.

Investing in the S&P 500 index strategy brings concentration risk. For example, information technology companies like Apple, Microsoft, NVIDIA, and Broadcom account for 31.7% of the index.

To reduce this risk, investors may consider shifting towards a total market investment portfolio like the Vanguard Total Stock Market ETF (VTI), which can reduce the concentration of the portfolio.

Furthermore, to gain broader exposure, investors may also consider purchasing small-cap value stock ETFs. Morningstar analysts currently consider this area to be "severely undervalued"