2024 was another fantastic year to be an investor in stocks. The S&P 500, which tracks the 500 largest publicly traded companies in the U.S., was up nearly 25% last year. Sounds great, right? But when you look at your year-end 401(k) statement, you probably will see a lower percentage gain. What gives? It’s because your account is properly diversified.
While you likely hold a good amount of large U.S. companies in your portfolio, which is what the S&P 500 represents, you probably also hold small- and mid-sized U.S. companies, international companies, and maybe even more conservative investments such as bonds. These other investment categories didn’t match the performance of the S&P 500 in 2024 – and that’s been true over the past 10 years.
The outperformance of large U.S. companies may have you wondering if you should invest all of your money into the S&P 500. While perhaps tempting, this is not a sound investment strategy.
There have been extended periods when large U.S. companies lagged behind other investment categories. As you can see in the chart to the right, from 2000 to 2009, the only investment category that produced a negative annual return was large U.S. companies. Unfortunately, it’s impossible to predict each year which category will have the highest return. Investing would be far easier if you could.
But you don’t need to predict the market to be successful as an investor. From 2000 to 2024, the S&P 500 earned 7.6% on average. If you had invested in a more diversified portfolio that was 60% stocks – some large, mid, small and international – and 40% bonds, you would have earned a yearly return of 7.0%. Not bad considering a diversified portfolio is much more conservative. Achieving your life goals shouldn’t be predicated on achieving the absolute highest investment returns each year.
Being diversified means you will always hate some part of your portfolio. But it also ensures you hold the part of the market that performs the best each year.
A diversified investing approach, consistently followed, has a far better track record than attempting to capture the highest flying investments each year. Diversification works – and it still matters.