Warren Buffett’s S&P 500 bet paid off. Some experts say it may be time to diversify

In 2007, Warren Buffett made a $1 million bet that he could outperform hedge fund managers within a decade by investing in the S&P 500 index fund.

In 2017, he won.

Some individual investors make similar bets on the S&P 500 with their own money, whether in exchange-traded funds or mutual funds.

True to its name, the S&P 500 index includes the 500 largest US companies. The index is market-weighted, and the weight of each listed company is based on the total number of shares outstanding. The index is rebalanced quarterly.

The three largest ETFs track the S&P 500 index, according to Morningstar. That’s them SPDR S&P 500 ETF Trustwhich trades under the ticker SPY; iShares Core S&P 500 ETFlabeled IVV; again Vanguard S&P 500 ETFtrading as VOO. Together, those funds make up about 17% of the US ETF market, according to Morningstar.

In 2024, VOO was the leader of those three funds in attracting new capital, with $71 billion in revenue during the first nine months, according to Morningstar, beating SPY’s record set in 2023 by $1 billion 20.

The S&P 500 index continued to dominate the headlines of all time in 2024. Year to date, the index is up nearly 20% since Oct. 8. In the last 12 months, it has increased by 33%.

That performance helped some analysts’ forecasts for the index heading into this year, thanks to a stronger-than-expected US economy.

“That recession that everyone wanted didn’t happen,” said Larry Adam, chief investment officer at Raymond James.

Now, the company based in St. Petersburg, Florida predicts that the US economy will slow down. However, the rise in stocks may not be as strong.

“I think you’re going to see a lot of muted performance — still high, but muted,” Adam said.

Historically, from early October to Election Day, the market tends to drop, on average, about 1.5% or more, he said.

“The reason for that is that the market doesn’t like uncertainty,” Adam said.

The good news is that the market tends to recoup those losses and move higher, he said.

Goldman Sachs recently raised its S&P 500 forecast for 2024 to 6,000 from 5,600 to reflect expected earnings growth. Tom Lee, Fundstrat Global Advisors managing partner and head of research, also recently told CNBC that he’s calling for a 6,000 target for the S&P 500 by the end of the year.

Investing in the S&P 500 index is a popular strategy.

“There are reasons why it works well that will never change,” said Bryan Armour, director of strategic research at Morningstar.

Among the advantages: It’s low-cost, captures most of the opportunities available to active managers and is “hard to beat over time,” he said.

“In general, I would say the S&P 500 is better, more diversified than most investment strategies,” Armor said.

That would allow you to take a set-and-forget approach and avoid trying to time the market, he said.

However, there are specific risks that come with investing exclusively in the S&P 500 index fund on the equity side of the portfolio.

“The IS&P 500 has been the best thing [investors] I would have done seven or eight years ago,” said Sean Williams, a certified financial planner and principal at Cadence Wealth Partners in Concord, North Carolina.

“A lot of people have that mindset of, ‘Why would I do something different?’ he said.

In general, it’s not a good idea for everything to be in any position, even if it’s the big American companies that have done very well in the last decade, Williams said.

It always helps to be exposed to other areas, he said, such as multinational, small and medium-sized companies, and real estate, for example.

Investing in the S&P 500 index comes with concentration risk. For example, information technology comprises 31.7% of the index, including companies an apple, Microsoft, Nvidia again Broadcom.

To reduce that risk, investors may consider moving to an overall market portfolio such as Vanguard Total Stock Market ETFtrading under the ticker symbol VTI, could provide a narrower focus on the top of the portfolio, Armor said.

Additionally, to gain broader exposure, investors may also consider buying a smaller number of ETFs, an area Morningstar analysts currently think is “overlooked,” Armor said.