4. Branching Out from an S&P 500 Index Fund
As simple and easy as it is to invest in an S&P index fund, there are times when it just doesn’t cover all the bases. The S&P 500 is made up of U.S. companies, therefore an S&P index fund will not provide investors with much - if any - exposure to international stocks. Most 401(k) plans offer at least a couple of international, or global funds for investors to choose - some offer 6, 8 or more!
An S&P index fund doesn’t provide investors with direct exposure to precious metals, either. Many 401(k) plans are beginning to offer “sector specific” funds/ETFs that focus on particular investment sectors. The metals group is an example of one of those sector specific funds.
There’s no doubt that global markets can sometimes outperform U.S. markets. It goes without saying that the multi-year bull market in gold has certainly fattened up many investors’ accounts. But what if new investors don’t feel confident enough yet to “branch out” beyond their S&P index fund - are they missing out by not investing in these other types of funds? Probably, but not as much as they’d think.
Many of the companies listed in the S&P 500 do business overseas. In fact, when the U.S. economy was slumping after the 2008 collapse, much of the record earnings the larger companies like General Electric (GE) and MacDonald’s (MCD) reported were a result of their overseas operations. Those earnings show up in the companies’ share price and as a result, in the S&P index as well. Metals and mineral companies such as Cliff Natural Resources (CLF) and Freeport McMoran (FCX) often benefit from rising prices and their stocks’ performance shows up in the index, too.
So all is not lost if investors don’t get into these funds, but when their charts are screaming to be bought - if they are outperforming the S&P - it pays to get in! Otherwise, there’s no need to buy them even if it’s just for the sake of diversity.
> Right about here is where we want to say a few things about another bit of “Wall Street Wisdom” that we disagree
with: diversification. We hear it from the talking heads on TV; we hear it from the big investment institutions; we
hear it from our local brokers: diversify, diversify, diversify! It’s hard to find any source of "Wall Street" investing
guidance that doesn’t preach the virtues of diversification.
The idea goes something like this: "spread your money across a wide range of investments. Over the long
haul, some of those investments may go down in value, but others will rise, thereby off-setting the losses and
adding to our total gains. The wider you diversify, the more safety you generate for your overall portfolio."
Just like “buy-and-hold,” this is another “set it and forget it” investing strategy that makes no sense to us…and
no sense to some pretty well known investors, too! Here are a few thoughts on diversification from names you
probably know or have heard of:
Robert Kiyosaki (Rich Dad, Poor Dad series author): “One of the Sacred Cows of Money is, “Invest for the long term in
a diversified portfolio.” This sacred cow needs to be shot. It’s bad investing, and it hurts millions of people - especially
when the markets crash.” [FACT CHECK!]
Jim Rogers (world renowned trader/investor): "Diversification is something that stock brokers came up with to protect
themselves, so they wouldn't get sued [for making bad investment choices for clients].” [FACT CHECK!]
William J. O’Neil (founder of Investors Business Daily): "Diversification is a hedge for ignorance." [FACT CHECK!]
Warren Buffett (the Oracle of Omaha): “Wide diversification is only required when investors do not understand what
they are doing.” [FACT CHECK!]
Hey, life is short - especially our “investing life!” We need to make the most of it. That means putting our money to work in stocks/funds that are going up, period. Now, we might invest in a global fund or a metals fund, but it will be because they are trending higher, not because we feel some need to diversify!
OK, we're done ranting...
What if there are multiple funds of the same type in our list of choices? What if we have 3 or 4 global or metals funds to choose from and those funds in general are moving higher - how can we find the best one or two for our portfolio? We say, go straight to the charts! The charts will tell us which one(s) are performing best and that's where we want our moolah.
At times it will be tough to tell by looking at and comparing mutiple price charts which ones are better performing funds. In those cases, we like to use Comparison Charts. Comparison Charts allow us to overlay charts of different funds or markets to get an "up close" performance comparison. Comparison Charts have other uses we'll explore later, but for choosing between similar-type investments, they are hard to beat. Here's how to set up your own Comparison Chart Template.
Now, in the event that Comparison Charts still don't provide any real difference in performance, we say go with the one(s) with the lesser expense ratios. All other things being equal, let's keep those costs down - they can hurt our bottom lines over the long run!