Issue #29: The Truth About the S&P 500 Nobody Tells You
Most investors think the S&P 500 is the best investment — but the real story behind its returns will make you rethink everything.
Reading time: 5 minutes
The Safe Bet Isn't Always the Smart Bet
You might remember I’ve mentioned this before: one of the easiest, no-stress ways to invest and forget is through an index fund like Vanguard’s S&P 500 fund VOO 0.00%↑. The S&P 500 represents 503 of the largest and strongest businesses in America. On paper, it looks bulletproof. If you don’t want to think too much, it’s an excellent option.
However, there is a serious problem with the VOO 0.00%↑ and other similar index funds. If you have a risk tolerance and a long-term mindset, then settling for a simple S&P 500 tracker could be one of the most costly mistakes you make in your investing life.
Why?
Because the S&P 500 is a pile of shit—a flaming, radioactive, glitter-encrusted dumpster fire. It’s like betting your life savings on a turtle with a limp in a race against a rocket-powered cheetah. It is a slow, overweight vehicle where a few engines are carrying the weight of hundreds of broken parts.
Allow me to explain.
The S&P 500 is weighted by market capitalization, not equally. The bigger the company, the bigger its share of the index. Right now, there’s a group called the Magnificent 7 — Apple, Microsoft, Nvidia, Amazon, Meta (formerly Facebook), Alphabet (Google), and Tesla.
As of April 2025, these seven companies make up 30.28% of the entire S&P 500. That means nearly a third of the index is concentrated in just seven businesses. More importantly, these seven companies are responsible for over 50% of the index’s total return.
In plain language, you are not buying 503 companies when you buy the S&P 500. You are buying seven winners and 496 passengers.
This phenomenon is not new either. Professor Hendrik Bessembinder’s 2018 study analyzing the U.S. stock market from 1926 to 2016 found that:
Just 4% of publicly traded companies accounted for the entire net gain of the U.S. stock market.
More than half of all individual stocks delivered negative lifetime returns.
The most common outcome for a stock was a complete loss — a 100% wipeout.
The vast majority of U.S. stocks underperformed even one-month Treasury bills.
The market has always been ruled by a tiny fraction of extraordinary companies. It is a brutal game where most players lose, and only a few make it worthwhile.
Some people suggest solving the concentration problem by buying an equal-weighted S&P 500 fund, such as the Invesco S&P 500 Equal Weight ETF (RSP 0.00%↑).
In theory, this seems fairer—every company, large or small, gets a 0.2% slice. But in practice, equal-weighted funds have consistently underperformed the original, weighted S&P 500 over long periods. Worse, they still contain the same "Magnificent 7", just with smaller allocations.
Let's look at some real numbers to understand the scale of the problem.
The Numbers Speak for Themselves
If you had invested $100 into each of the Magnificent 7 companies in 2012, your $700 investment would have grown to $52,511 by April 2025.
If you had put $700 into VOO 0.00%↑, the S&P 500 ETF, you would have ended with approximately $2,813.
If you had put $700 into an equal-weighted S&P 500 ETF like RSP 0.00%↑, your final amount would have been around $2,370.
The difference is mind-blowing. But you know me — I’m not a bullshitter. There’s a caveat you need to understand.
To be fully transparent, most of that $52,511 gain came from just two companies: Nvidia and Tesla. NVDA 0.00%↑ alone contributed $33,625, while TSLA 0.00%↑ added $12,282. They heavily skewed the results.
But even if you excluded them and only invested in the remaining "Magnificent 5" (Apple, Microsoft, Amazon, Meta, Google), the returns would still be impressive. A $700 investment split across those five would have grown to $9,245 — more than triple the return of the S&P 500.
The Risks of Betting on Winners
Of course, the S&P 500 has advantages that cannot be ignored. It is, relatively speaking, risk-free if you hold long enough. The real danger lies in investing a lump sum at a market top and waiting years to break even. Dollar-cost averaging across many weeks, months, or years largely eliminates that timing risk. And unless you believe America will collapse economically, long-term S&P 500 investors will likely do just fine.
In contrast, betting on a handful of companies comes with serious risks.
First, there is no guarantee that today's winners will continue dominating for another decade. Historically, the top 10 U.S. companies have almost completely changed every 10–15 years. Not to mention, in the 1960s and 70s, there was the "Nifty Fifty," and later, in the 1990s, the "Four Horsemen."
Some go bankrupt, others stagnate, new challengers emerge. To succeed, you must actively monitor and rebalance your portfolio, something most passive investors are not prepared for and simply do not want to do.
Second, there is the issue of volatility. Over the past decade, the average drawdown of the S&P 500 was 23.9%, while the average drawdown for tech-heavy portfolios like the Magnificent 7 was 47.3%.
When you invest in concentrated growth stocks, you must accept the reality that your portfolio could lose half its value at any moment. And you must have the emotional discipline to hold through it without flinching.
You Can’t Win Big by Thinking Small
In the end, the choice is simple but not easy.
You can choose the slow, safe road and settle for modest, steady gains over decades with the S&P 500.
Or you can accept higher risk, higher volatility, and more work and chase greatness by aligning your portfolio with the few companies that actually move markets.
Or you can skip the whole thing, turn into a crypto maximalist, and buy Bitcoin. :)
The worst mistake is believing that buying a broad market index is automatically the best strategy. It isn't. It never was.
Markets have always belonged to the winners.
Thank you so much for reading! See you next week.