What are the risks to a portfolio of 100% SPY?

I mean, aside from diversifying outside the markets. I preach passive investing pretty religiously to everybody who’ll listen, but I always get a little uncomfortable suggesting allocating your equity portfolio to 100% Spyder. Probably due to the lifetime of being told “diversify diversify diversify”, even though SPY is by definition already extremely diversified.

So I guess the question - what’s the risk that SPDR could go under? That SPY would suddenly stop tracking the S&P? Or, if your goal is to simply put 100% of your portfolio in the US economy, is there any reason NOT to just buy into SPY and nothing else?

No need to diversify if you plan to hold it for 30 years.

Uh, 100% domestic stocks is not a good reco bro. You’ll need some diversification to international markets, fixed income, real estate, and commodities. All of these can be had cheaply via ETFs. Something like 40% US Stock, 30% International Stock, 15% Fixed Income, 10% Real Estate, and 5% Commodities would be a pretty good allocaton for most people in their 20s. iShares, Proshares, and Vangaurd all offer cheap ETFs to build said portfolio.

Hmm…SP500 also takes into account global growth these days due to US exports, but you know that. Your only risk is systematic risk and tracking error as you noted. I think SPDR is pretty robust and has been around for a long time, it should be fine.

Why not invest everything into Russell 2000 Value? Small outperforms large, value outperforms growth, with a long enough time frame you will do better.

100% SPY is fine if 1) you have a long holding period, 2) the volatility (approx 15% long term) is consistent with your risk tolerance (otherwise add cash to tone it down or lever up if you can handle more), and 3) you don’t expect the US to be destroyed in war or revolution in the interim.

CvM has a point that you could probably do a better by diversifying abroad, particularly into EM and possibly other asset classes. But that’s not a huge benefit, just a moderate one.

Dont forget to reinvest dividends.

In the shorter therm, the S&P has outrun virtually all other asset classes, that suggests a divergence that will mean revert sometime soon (within a year or two). That would mean other assets perform better, or the S&P has a major correction. Hard to say which will happen and when.

ETFs have to hold the assets - for instance, SPY must own the 500 stocks of S&P 500. Unless the ETF company does something illegal, it seems like the ETF will not default.

It has been shown that over a 30 year period, markets have similar returns when you take into account currency movements. Short term you can diversify across regions…but over 3 decades it won’t make much of a difference.

Yeah, I wasn’t worrying so much about spy specifically so much as etf’s in general. My usual spiel is to buy etf’s and just call the economy rather than trying to pick winning stocks, so buying small caps or emerging markets etf’s or whatever would fall into this situation as well

I never thought about mean reversion though, definitely a good point

Not sure about 30 years but certainly in the medium term, the investment outlook for US equities is not good. Here is the 10 year PE:


I read recently that with the cyclically adjusted PE this high, the expected return for the next 10 years is -0.5% per annum, the worst figure since 2000.

Given the above, I think it is a smart move to diversify your portfolio. At the least I would try to pick and choose what US stocks to buy rather than just investing in an index ETF.

Of course asset allocators have been getting around 3-4% YTD (alas, my group is in that category), whereas the S&P is up around 17% (was as high as 22%) total return. But the S&P is pretty much the only major asset class that has done much more than a few percent.

So the question is whether to abandon other asset classes and throw money into equities because they’ve been going up (I think that’s a bad idea), or deal with the pain of being diversified.

The future in bonds doesn’t look too good either, at least if you go out on the curve. The advantage is that eventually interest rates will go up and that will attract bond-buyers, so I’m pretty comfortable having a lot of cash around right now and have been over most of the year, though it has been a bit embarassing to look at.

At BChad’s suggestion, I checked out DFA and their strategy. I really like it. It’s passive investing, so they don’t have all the turnover and expenses that actively managed funds do, but they’re also not married to an index, which means that they don’t have to make decisions that are economically poor (like selling GM after it’s already gone to pot and buying Cisco, which may or may not be overvalued).

That being said, I’m also not sure why 100% US large-caps would be a bad asset allocation, given that you have a long time horizon and can weather the 2002’s and 2008’s.