Written by 
Edited by 
Looking at long-term performance of the S&P 500, you might wonder why you wouldn’t just invest your entire 401(k) in it. The numbers are compelling: The index has averaged about 10.5% per year historically, and its returns in recent years have been even stronger.
So, why not just “go all in?”
Do you have a financial question you want answered? Email AskAnAdvisor@smartasset.com or connect with a financial advisor for free using our matching tool.
The answer depends on where you are in your financial journey, whether you’re still in the accumulation phase and building toward retirement or you’re already in retirement and relying on your investments for income. In both cases, there are real advantages to owning the S&P 500. But there are also meaningful risks and blind spots that deserve attention.
The Appeal and Risk of Going All In for Younger Investors
For investors in their 20s, 30s or even 40s, investing heavily in the S&P 500 makes intuitive sense. Time is on your side, giving you the ability to weather market cycles and let compounding do its work in the decades before retirement.
Regular contributions to your 401(k) also provide a built-in advantage in the form of dollar-cost averaging. By contributing a portion of each paycheck, you automatically buy more shares when prices are low and fewer when they’re high. Over time, dollar-cost averaging helps smooth out volatility and removes emotion from the decision-making process. It’s a disciplined, consistent approach that rewards and reinforces patience.
But there’s a difference between being thoughtfully aggressive and putting it all on red. Investing 100% of your 401(k) in the S&P 500 comes with some meaningful risks that aren’t always obvious at first glance. (And if you need help selecting investments that align with your goals, speak with a financial advisor.)
Behavioral Challenges of Investing Only in the S&P 500
For most young investors, the first and most important question isn’t whether you can bear the risk; it’s whether you can stay the course when volatility arises.
Market history provides some humbling reminders. The S&P 500 has experienced multiple periods of severe decline and years of flat or negative returns. These times are known as the “lost decades.” During the 2000s, for instance, investors who stayed fully invested in the index saw no real growth for 10 years. The same was true during parts of the 1970s and, on a more extreme scale, during the Great Depression.
Even within an investor’s lifetime, sharp market declines of 30%+ are inevitable. When those moments arrive, headlines are grim, jobs may be at risk and economic data may deteriorate. If your 401(k) balance suddenly gets cut in half, will you stay invested and remain laser focused on the long-term?
Many investors believe they will. Until they experience it. Our own firm’s experience has shown that risk tolerance questionnaires tend to look much more aggressive in bull markets than they do during bear markets. (Consider working with a financial advisor if you need help avoiding making emotional financial decisions.)
Concentration Blind Spot
On its surface, the S&P 500 appears broadly diversified. After all, it holds 500 companies across all major industries. But recent trends, investment themes and investor preferences have led the index to become much more concentrated than its name implies.
Specifically, 10 stocks account for more than 30% of the index’s overall weight and have driven about the same proportion of total returns over the past few years. When these companies (which are largely in the technology and communication services sectors) perform well, returns for the index look fantastic. But when they stumble, the entire index suffers.
Another layer of concentration comes from geographic exposure. The U.S. currently represents about half of the world’s total investable market, an unusually high percentage compared to history. By investing solely in the S&P 500, you’re effectively betting that U.S. companies will continue to outperform every other region indefinitely. Including exposure to international stocks and other asset classes can both reduce risk and potentially improve long-term outcomes without abandoning an equity-oriented approach.
(And if you need help spreading your portfolio across different asset classes and regions, consider working with a financial advisor.)
An Nvidia Analogy
If the argument is whether you should invest in an asset that can potentially generate 10.5% annually, why not invest in something that has done even better? Over the past decade, Nvidia has delivered incredible returns: Over 50% per year on average. So, why not put all of your money in Nvidia?
Because that story cuts both ways. Between 2001 and 2002, Nvidia’s stock fell 90%. Even over the past 15 years, it’s seen four separate drawdowns of more than 30%. Would you have stayed invested through each extended downturn?
While the S&P 500 is obviously more diversified than a single company, the behavioral challenge is similar. From 2000 to 2002, the index dropped about 47%, then it lost 50% only a few years later during the Global Financial Crisis of 2008. Even diversified markets can test your conviction.
Diversification isn’t about eliminating risk—it’s about managing it. By holding other asset classes like bonds, international stocks or real assets, you consciously trade some upside for greater stability when volatility strikes, especially when you least expect it.
Sequence and Longevity Risks
As you approach retirement, the conversation shifts. The question isn’t just “What will the market return?” but “What happens if the market drops when I need to make withdrawals?”
This is known as sequence of returns risk, and it can have lasting consequences.
Imagine a retiree with a $2 million portfolio invested entirely in the S&P 500 who plans to withdraw $500,000 for a home purchase. If the market falls 50%, that portfolio drops to $1 million. Now, that same $500,000 withdrawal represents half the portfolio, not one quarter. To recover to its original value, the remaining $500,000 would need to quadruple. It could take decades to make a full recovery in a period of life when time isn’t necessarily on your side.
That’s why liquidity and diversification matter so much in retirement. Having access to lower-volatility assets for near-term needs allows the rest of the portfolio to recover and continue compounding. (Consider working with a financial advisor as you approach and enter retirement.)
The Emotional Side of Retirement Investing
The psychological challenges of investing don’t disappear in retirement. If anything, they intensify. Without a regular paycheck, your portfolio becomes your sole source of income. During downturns like the COVID-19 selloff, many retirees felt immense pressure to move to cash as markets were near their lows. Those emotional decisions can have long-term costs that are difficult to recover from.
At the same time, staying too conservative can create its own problem: longevity risk, or the risk of outliving your money. With retirement potentially lasting 20 or 30 years, you still need growth to maintain purchasing power and keep pace with inflation.
The solution isn’t a binary choice between “all stocks” or “no stocks.” It’s about matching your investments to your time horizon. For example, funds you’ll need in the next 12–24 months can be set aside in lower-volatility assets like cash or short-term bonds, while longer-term funds remain invested for growth. (If you’re looking for a personalized retirement investment plan that aligns with your timeline and comfort level, connect with a financial advisor for free.)
Putting It All Together
Whether you’re just starting to build wealth or preparing to live off it, investing is always a balance between growth and protection. The S&P 500 has proven to be a powerful engine for long-term compounding, but even the best engine needs a stabilizer.
A well-diversified portfolio doesn’t mean sacrificing returns. It means smoothing the ride so you can stay invested through all types of market environments. By incorporating a mix of asset classes, aligning your risk with your time horizon, goals, assets and liabilities, and acknowledging the emotional side of investing, you give yourself the best chance to capture the market’s long-term benefits without letting short-term volatility derail your plan.
In the end, investing isn’t about finding the “perfect” allocation; it’s about finding the one you can stick with.
401(k) Investing Tips
- Many plans allow you to automate ongoing portfolio maintenance, which can reduce drift and keep your target allocation intact during volatile markets. If your plan offers a managed account option, it may provide more personalized allocation work than a standard target-date fund, though it’s worth comparing any added fees to the service offered.
- A financial advisor can help you integrate your 401(k) strategy with other pieces of your financial life, such as taxable investing, Social Security planning and withdrawal sequencing. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Got a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Jeremy Suschak, CFP®, is a SmartAsset financial planning columnist who answers reader questions on personal finance topics. Jeremy is a financial advisor and head of business development at DBR & Co. He has been compensated for this article. Additional resources from the author can be found at dbroot.com. Please note that Jeremy is not a participant in SmartAsset AMP and is not an employee of SmartAsset.
Photo credit: Photo courtesy of Jeremy Suschak, ©iStock.com/nespix, ©iStock.com/Jacob Wackerhausen