I love to buy individual stocks, but I can see why index investing has some advantages. The main one is that I’m able to invest in all the stocks in, say, the FTSE 100 without having to pick and choose. This would give me instant diversification in one fell swoop.
One of the most popular indexes in the world is the S&P 500. This collection of companies has generally outperformed the UK stock market for decades now.
However, the FTSE 100 is cheaper and pays a much higher dividend than the S&P 500. So which one should I invest in? Let’s explore.
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The Footsie
London’s blue-chip index hit a new all-time high of over 8,000 points back in February. Then a handful of banks ran into trouble at the beginning of March and the FTSE 100 sold off.
However, now the dust has started to settle and a full banking meltdown looks unlikely, and the Footsie has bounced back. In fact, since its March low, it has risen over 6%.
Below is the index’s performance versus the S&P 500 over four time periods.
| Timeframe | FTSE 100 | S&P 500 |
| 6 months | +14.2% | +11.5% |
| 1 year | +3.2% | -8.0% |
| 3 years | +35.5% | +42.3% |
| 5 years | +7.7% | +54.0% |
These returns don’t factor in dividends, which make the FTSE 100 so attractive to many investors. That’s because it currently yields an average 3.5%, which is about double the yield of the S&P 500.
However, this high yield does hint at a perceived weakness of the FTSE 100. This is that it’s heavily skewed towards ‘old-world’ companies, such as dividend-paying miners and oil giants.
Indeed, UK-focused fund manager Nick Train recently said the UK was a “backwater” of global markets. Ouch!
The strategy I settled upon a few years ago is similar to Train’s. I cherry-pick what I consider to be the best 20% or so of companies in the FTSE 100 and hold these as large positions. I don’t bother with the index because around half of it doesn’t appeal to me.
The S&P 500
As the name implies, the S&P 500 tracks more stocks than the FTSE 100. That means if I picked the best 20% here I’d end up with 100+ stocks in my portfolio. I consider that far too many for me to follow.
So, in theory, I see much more value in utilising an S&P 500 index fund. I’d get instant exposure to the fortunes of hundreds of powerful global companies.
My concern though is that it’s very tech-heavy, with Apple having an approximate 7% weighting. Other mega-caps include Microsoft, Google-parent Alphabet, and Amazon. In fact, just these four shares make up around 20% of the index.
Meanwhile, Berkshire Hathaway, which is also quite heavily represented, also has a massive stake in Apple. And the iPhone-maker is also in my own portfolio, as is Alphabet (a recent addition last month).
So, for me, there’s a risk of portfolio overconcentration (particularly in Apple) were I also to invest in the S&P 500.
Therefore I’m going to keep investing in individual stocks from both indexes, whenever I identify timely opportunities. This strategy has served me well for many years now. And, as the old saying goes, if something ain’t broke, don’t fix it.
