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My approach is to invest in individual companies, but with the S&P 500 Index At all-time highs, I can certainly see the appeal of index funds. They would eliminate the need for me to research and track specific stocks.
Even Warren Buffett says passive investing is a solid strategy. In fact, he said that Jack Bogle, the father of index funds, had “He has probably done more for the American investor than any other man in the country.“.
The S&P 500 measures the performance of the 500 largest American companies. Today, it is dominated by technology titans such as Microsoft, Appleand Nvidia.
Here, I'll look at how much I would have now if I had invested £5,000 in an S&P 500 exchange-traded fund (ETF) at the start of the year.
Some were bassists
Looking ahead to 2024, some market observers were not optimistic about the outlook for the index. For example, Marko Kolanovic, who was then JP MorganThe chief global markets strategist of, predicted that “Another challenging year for market participants“.
For the S&P 500, the investment bank estimated earnings growth of 2-3% and a target price of 4,200 points, with a “downward bias“.
Considering the index started the year at 4,769, it wouldn't have been a great investment.
What has happened so far?
Yet historically the S&P 500 has returned just 10% annually with dividends reinvested, and has risen two out of every three years on average.
Like Manchester City or Real Madrid, it tends to win more than it loses. That's why passive investing works and is so popular.
So far this year, the S&P 500 has soared by just over 20%. This means my £5,000 investment would now be worth £6,000 on paper. Add to that another 1.3% expected in dividends and that's a spectacular return.
Of course, the year is not over yet. The S&P 500 could always fall sharply from here.
A high price to pay
That risk is greater because the US market is currently very expensive.
Take the S&P 500's Shiller price-earnings ratio (or cyclically adjusted price-earnings ratio) as an example. This compares the index's price to its inflation-adjusted earnings averaged over the past 10 years. Essentially, it smooths out short-term economic fluctuations.
Right now, the S&P 500's Shiller price-earnings ratio is around 36, double its historical average!
Overvaluation 101
Tesla (NASDAQ:TSLA) is a clear example of this. The electric vehicle giant's revenue growth has slowed to single digits and profit margins have declined. In the second quarter, its sales fell for the second consecutive quarter.
However, you wouldn't know it by looking at Tesla's stock price, which has somehow risen 47% in the last six months!
This puts the stock on a forward price-to-earnings ratio of 101! In other words, for every dollar of expected future earnings (by 2024), investors are currently paying $101 for the stock.
Keep in mind that Tesla stock could always go up after the upcoming robotaxi event on October 10, but with EV demand being sluggish and competition increasing, there is a lot of risk at the current multiple.
We continue investing
However, there are parts of the UK stock market that I find attractive at the moment. Here are three of them:
- Small Cap Stocks
- Some mutual funds trade at double-digit discounts to their underlying value
- FTSE 100 financial stocks with ultra-high dividend yields
These are the ponds I will be fishing throughout October.