What is considered to be a prudent investment strategy for retirement? This is a question many Americans are asking. 62% of Americans are invested in the stock market as of 2025. Millions of others are researching what to invest in, spending time scouring Google, ChatGPT, and online forums for timely advice.
Across the landscape of investing sources of information that exist today, you’ll find a plethora of opinions.
“Buy individual stocks of only companies you know!”, some say. Others will tell you that the stock market is scary, intangible, and that precious metals are a better bet. For a long time, the advice consisted of finding a “solid mutual fund, with a good manager, with a good track record of picking the right stocks.”
What has become an even more common piece of advice in recent years is “just buy an S&P 500 Index fund!”
Since their introduction in 1976, S&P 500 Index funds have been a real “game changer” for investors. The concept, introduced by John C. Bogle of Vanguard, was simple: Rather than trying to beat the market, participate in the market. That’s it. No more actively trying to buy and sell stocks within a fund, trying to outperform the market. In doing so, you can potentially save dollars on the cost of investing (index funds are about 5 to 10 times less expensive than actively managed mutual funds on average). The S&P 500 has also delivered a competitive rate of return over time, by comparison. Because the S&P 500 Index fund comprises 500 companies, many consider it a “diversified” asset. By investing in this index, you’re betting on American business, and that has reaped many benefits for investors over the years who have had the goal of accumulating assets in their investment portfolios.
When it comes to retirement planning, however, there is much more to consider than accumulation or chasing the highest return. There are cash-flow, tax, and liquidity considerations. Here are some reasons to consider index investing.
The S&P 500 has a history of volatility.
As with any investment, the risks need to be considered. There is investment risk, often tied to market volatility and the time horizon. For example, there are numerous examples of the S&P 500 Index dropping in value over a relatively short period of time. Has it recovered since this drop? Yes, and then some. However, for most retirees or pre-retirees, this would be very unnerving to live through.
Sequence of Returns Risk is Real
This can lead to another risk, the sequence-of-returns risk, which is the risk of having to withdraw money during a market downturn. We’ve seen it happen in real time: a single fund or asset in an investment portfolio declines. The investor doesn’t want to spend money from the portfolio after it has declined; however, they still need to spend money. There are bills to pay for, after all. Therefore, they have no choice but to withdraw money, even during a severe downturn. This can have devastating impacts for many investors and could even reduce a portfolio’s longevity by years.
Concentration Risk
The S&P 500 is widely regarded as a broad index. There are 500 companies in it, after all! However, the S&P 500 is a market-cap weighted index. This means there is no equal weighting across companies in the index. The largest companies make up a larger portion of the overall index. This is where the term “MAG 7” comes from. This phenomenon is becoming increasingly alarming as the “MAG 7” stocks continue to outperform the rest of the S&P 500 this decade to date.
Diversification Works!
Diversification has been shown to work when implemented systematically and without emotion. While the S&P 500 may seem diversified, the investing world is much more than this index. The S&P 500 is just the largest 500 publicly traded stocks in the US. There are real returns to be had in other categories of investing – international stocks, small stocks, mid-sized stocks, bonds, and money market funds. These become especially valuable when the S&P 500 is underperforming, as other investments may be outperforming. For example, in the 2000s, the S&P 500 actually had a negative return (-0.95% annualized), while international stocks were up 7.07% (annualized) over the same period. Investors with bonds at the time were also grateful to have a relatively high point from which to withdraw that year.
A successful retirement plan will involve investing and taking risks. However, those risks should be thoroughly planned for and addressed in a careful, calculated manner. The S&P 500 remains a prudent option for some long-term investors, even during periods of volatility, but it may not be prudent or sufficient for many retirees.
At Vocare Wealth Advisors, we help pre-retirees and retirees accurately assess the risk in their portfolios and make appropriate changes to meet their retirement needs, using a well-diversified strategy.
Any opinions are those of Vocare Wealth Advisors and not necessarily those of Raymond James. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Investing involves risk, and you may incur a profit or loss regardless of the strategy selected, including diversification and asset allocation.
S&P 500: This index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. It consists of 400 industrial, 40 utility, 20 transportation, and 40 financial companies listed on U.S. market exchanges. This is a capitalization-weighted index calculated on a total-return basis, with dividends reinvested. The S&P represents about 75% of the NYSE market capitalization.
Indices are not available for direct investment. Index performance does not include transaction costs or other fees, which will affect actual investment performance. Past performance is not indicative of future results.
