Do you recommend the Nasdaq 100, S&P 500, or a 50/50 allocation?
My job is now offering two large-cap stocks. The S&P 500 Index and Nasdaq 100 Index. I've read a bit about the debate on which is the wise choice, but would it be wise to invest in both evenly as opposed to choosing one over the other? Is there a recommended favorite?
These two indices are some of the main benchmarks that U.S. investors utilize when analyzing the stock market. First, it is important to understand each. The S&P 500 is a U.S. index of 500 large-cap stocks based on size and industry. It is widely considered the major indicator and gauge of the overall U.S. stock market. The Nasdaq 100 is an index of 100 large cap stocks in various industries excluding the financial sector. As financial planners, we are firm believers in diversification. Diversifying our assets helps reduce risk by investing in many different sectors of the market.The goal is to not have all of your “eggs in one basket”, as many sectors will react differently to changing economic conditions.
Next, it’s important to analyze your specific goals and objectives, how you are currently invested, your risk tolerance, investment time horizon, and any liquidity needs you may have now or in the near future. Once these questions have been identified, one can dive deeper into how the overall portfolio should be constructed, including which percentage should be in the large cap equity space of your account and which percentage should be deployed into each of the S&P 500 and Nasdaq 100 indices. When constructing a diversified portfolio, each security complements the others. It is imperative to understand the potential fluctuations of conservative, balanced and aggressive strategies (and everything in-between). Of the strategies listed, generally speaking, conservative strategies would have the least amount of overall risk and would be most geared towards fixed income (bonds/alternatives strategies). A balanced strategy would have an approximate equal blend of fixed income and equities. An aggressive strategy would be invested in mostly equities (stocks/alternative strategies).
Going back to your initial question, we suggest reviewing the entire list of investment options your company provides. Your overall portfolio asset allocation and your specific large cap index scenario are great topics to discuss with an independent financial advisor/planner. The advisor should analyze the amount of risk you are willing to take, your time horizon, and what you are looking to accomplish with these assets. After your advisor speaks to you on your current situation, he/she can help provide you with a suitable recommendation on how to move forward.
To be clear: The selections you’ve provided are not stocks, but are indices—or baskets of stocks—that attempt to benchmark certain parts of the overall stock market. The S&P 500 Index contains the stocks of 500 U.S. large-cap companies across various industries. The Nasdaq 100 Index contains 100 of the largest, most actively traded nonfinancial U.S companies listed on Nasdaq. A few major factors set the Nasdaq 100 apart from the S&P 500: The Nasdaq 100 doesn’t include financial companies, is more heavily weighted in technology companies, and has fewer stocks (and therefore less diversification). This generally means there is greater risk investing in the Nasdaq 100 versus the S&P 500.
It’s not totally clear how your company offers these two options. It’s possible that you’re referring to your company’s 401k program, in which you can select a particular allocation for your portfolio to which you and the company contribute. It’s also not clear what exactly the company is offering, since again, the Nasdaq 100 and S&P 500 indices are not actually investment options, but are benchmarks. Certain mutual and exchange-traded funds exist that attempt to mirror the performance of these indices. Let’s assume that your firm is offering two such funds.
It’s impossible to know what choice is best for you without knowing various factors, including, but not limited to, your age, other current investments, financial situation and needs, tax status, investment objectives, investment experience, time horizon, liquidity needs, and risk tolerance. In general, the Nasdaq 100 is riskier than the S&P 500. Determining how much of that risk to take on would reflect all of the factors I just listed. The broader issue is that neither of these options offers diversification beyond equity markets. Though it may make sense to have a blend of these two indices, you don’t have any exposure to other safer assets, particularly debt (bonds), which might mean you should maintain a substantial cash position in your portfolio (particularly if you are older). I recommend speaking with an advisor who can determine your needs, goals, time horizon, etc. to best determine proper allocation.
The S&P 500 Index is more similar to the assets that the typical 401k account and retirement account would generally contain. An investor could do quite well in investing alone in the S&P 500 Index, provided he or she knows when to be on defense when the market takes a downturn into a bear market like 2000-2002 and 2007-2008. The Nasdaq 100 is made up of the largest non-financial stocks on the Nasdaq and is heavily weighted in Technology stocks. The stocks underlying the Nasdaq 100 would make this index more concentrated with much higher risk. Unless you have an advisor who uses a tactical approach and is a craftsman in technical analysis it would be challenging to say the least. I would recommend that a typical allocation for someone who has 20 years or more for retirement would look like this. 80% S&P 500 Index and 20% Nasdaq 100 Index. If you have at least 10 years before you retire, I would lower the Nasdaq 100 Index to 10% and the S&P 500 Index to 90%. I believe it would be good to have both Indexes in your portfolio. My main concern would be if you have less than 5 years before you retire, then I would stay away from the Nasdaq 100. Have a good retirement!