How The S&P 500 Became So Overrated

Summary

• 50 years ago, Americans mostly bought the same platinum albums, but owned different stocks.  Today, Americans have diverse playlists but more homogenous stock portfolios.
• The S&P 500 is a relatively well-constructed index with good recent performance, but has its flaws that investors should consider critically.
• In this article, we take a look at the rise of some of the top S&P 500 funds globally, and 5 problems with too much investment herding into them.
• Looking for a helping hand in the market? Members of Long Run Income get exclusive ideas and guidance to navigate any climate. Get started today »

50 years ago, it seemed that Americans mostly listened to the same songs, but invested in very different portfolios of individual assets, including stocks. Today, it seems no two of our musical playlists are alike, but now enormous percentages of our discretionary and retirement assets are invested in the same uniform portfolios of stocks, most notably, in funds tracking the S&P 500 index. As one last indicator of how musicals have become more individual, note that most of the top-selling platinum albums of all time are from the 1970s and 1980s, and not since then. That's not just because we've stopped buying physical albums or started consuming more music through online streaming services, but because those technologies have made it easier for each of us to find our own individual preferences rather than just buying what everyone else is buying. Surprisingly, even though information and choice in financial markets have increased just as much over that same time, many stock portfolios seem to be getting more homogenous and less individual, even though we have the technology to enable portfolios matching individual tastes.

I see many parallels between the technologies of recording and distribution music and the distribution of packages of stocks and bonds, which is why it has surprised me how our application of these financial technologies has progressed so differently:

• In the 1970s, we mostly bought music on vinyl discs. These discs were large and hard to play on the go, but had an audio quality many audiophiles still find better than any recording technology since. During this decade, the main way to buy stocks was to call a human broker and pay a commission to buy one of the few stocks they happened to be paying attention to that day.
• In the 1980s, we started buying more music on

Analyst’s Disclosure: I am/we are long VTI, VTSMX, VT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.