An Index Fund May Not Be a Diversified Portfolio

The S&P 500 is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. This index is unmanaged and cannot be invested into directly.  Large cap domestic stocks are one asset class.  The S&P 500 index is diversified within that asset class, but there are other asset classes that would make up a diversified portfolio.

A diversified portfolio might also contain Mid cap and Small cap stocks, International and emerging market stocks, Commodities, Bonds, Real estate, Cash, Alternatives, and many other investments.  A diversified portfolio doesn’t guarantee a better outcome and no investment is immune from loss.

Comparing a diversified portfolio to a single stock index is not an apples-to-apples comparison.  It is closer to an apples-to-fruit salad comparison!