The Illusion of S&P 500 Outperformance: Why Smart Investors Think Bigger
Comparing your investment returns to the S&P 500 is like judging a restaurant’s success based only on its dessert sales—you're ignoring the appetizers, entrees, and drinks that make up the full experience.
Not to mention, you’re also not including the ambiance, food quality, quality of service/staff, etc.
Wouldn’t you say that holds some weight in a restaurant's success?
Similarly, using the S&P 500 as your measuring stick for “the market” or whether you “over or under” performed, is only looking at a small sample of the available investable market.
You’re looking at 500 companies and saying that’s representative of the ~9,300 investable securities globally.
Where do these other companies get factored into your judgment of investment success?
What even is investment success?
It’s easy to see the recent tear in S&P 500 returns and wonder why your total return wasn’t what the S&P 500 was.
It’s hard to see the recent tear in S&P 500 returns and realize that it reflects only a narrow slice of the market—one heavily concentrated in a few mega-cap stocks—while your portfolio is built for long-term resilience across multiple asset classes.
We don’t invest until retirement.
We invest for our lives.
If we’re starting to invest in our early 20s and live until 100, that’s nearly 80 years of investing.
Investors' dilemma today is that our perception of investment excellence is shaped by a time horizon far shorter than the one that truly matters and a recency bias that fixates on whichever country, asset class, or sector is currently outperforming.
This causes us to equate what's happened recently, with what we think will happen in the future - & many times, causes us to act in ways counterproductive to our long-term success.
The S&P 500 has been a dominant asset class - why not allocate more capital to that segment of the market?
Truth is, no one knows if the S&P 500 will continue to be a top performer in the global market.
Provided we don’t have a crystal ball in future returns, wouldn’t it be prudent of you today, to allocate your money around in such a fashion that allows for a more reliable long-term return?
Looking backwards in time, I can easily build the best portfolio by evaluating what’s performed the best.
Looking forward in time, I have to incorporate an acceptance of uncertainty that can best be managed by spreading capital over multiple counties and asset classes.
History does a great job of providing evidence for how market leadership rotates, valuations drive long-term returns, and no single asset class or country remains dominant forever.
Consider much of the 1980s in the energy sector where oil & gas companies dominated global markets returning ~17.5% annually in the 1980s.
After the 1986 Saudi price war energy prices declined for approximately 20 years following the 1980s peak.
Consider 1980-1989 where the Japanese Nikkei 225 returned ~25%/yr, encapsulating 45% of the global market capitalization.
This eventually led to a massive real estate and stock market bubble where for the next 34 years, Japanese stocks returned investors 0%.
Consider 2003-2007 where emerging market stocks were praised as the future of economic growth, returning ~37%/yr.
After the 2008 financial crisis dried up foreign capital, it took 10 years for emerging economies to recover to previous highs - with some countries yet to fully recover.
Consider the tech bubble of the 1990s where the S&P 500 returned ~21%/yr.
After the dot-com reality set in that companies weren’t profitable combined with federal reserve increasing interest rates and corporate scandals, the S&P fell ~50% where from 2000 - 2010 the US stock market returned nearly 0% - commonly referred to as the lost decade.
In many ways, John Maynard Keynes put it best:
"The markets can remain irrational longer than you can remain solvent."
To this, we owe prudence—a recognition that uncertainty is inevitable.
We owe it to ourselves to acknowledge the unknown, to discipline our disappointments, and to embrace the reality that being a global investor means enduring periods of underperformance, diversifying beyond today’s winners, and resisting the urge to chase short-term gains.
No discomfort, no reward.