Why People Are Wrong About the S&P 500 (and Why "Just Buy the Index" Isn't a Process)
A prospective member wrote to me recently with a very sensible question. Paraphrased, it was: "What does your process add over simply buying the S&P 500 and holding it?"
That's a good question, and I'll give you the honest answer first: we don't care about the S&P 500. We can own it. Many of our clients do. Warren Buffett and Charlie Munger both said a low-cost index fund is a perfectly good buy-and-forget investment.
The problem isn't the index. The problem is the word forget. Almost nobody actually does it. Here are six reasons why, with the data behind each one.
1. The S&P 500 falls, and it can go sideways for years
People talk about the S&P 500 as if it only goes up. Here is what it has really done:
Fall | Peak to trough | Time to get back to the old high (price) |
|---|---|---|
1929–32 | −86% | 25 years |
1973–74 | −48% | 7.5 years |
2000–02 | −49% | 7 years, then it fell again |
2007–09 | −57% | 5.5 years |
2020 | −34% | 5 months |
2022 | −25% | 2 years |
On the price index, the S&P 500 has had 12 falls of 20% or more since 1928. That's roughly one every eight years.
Then there are the sideways years:
2000 to 2013: the index didn't get back above its March 2000 level for good until March 2013. That's 13 years. Even with dividends reinvested, you made about 2% a year.
2000 to 2009: with dividends reinvested, the decade returned −9%. A whole decade with less money than you started with.
1968 to 1982: the price index finished almost 14 years lower than it started, through a period of high inflation.
Since 1988, with dividends reinvested, the S&P 500 has spent about 29% of all trading days more than 10% below its previous high, and about 15% of days more than 20% below it. Measured over any one-year window, roughly one in six has been negative.
2. You don't know what's in it
"I own 500 companies, so I'm diversified." Not really. The S&P 500 is weighted by company size. Today the top 10 companies make up roughly 38% of the index, and Nvidia alone is about 8%. A decade ago, the top 10 were under 20%.
So more than a third of your money is in ten companies, most of them tied to one theme: technology and AI. That may turn out fine. But ask yourself:
Could you name those ten companies?
Could you say why you own each one, and what they did in their worst falls?
If not, you don't really know what you own. When the sharp falls come, people who don't know what they own are the ones who sell.
3. You can build portfolios with a better reward for the risk
Returns only tell you half the story. The other half is how much pain you went through to get them. Two measures matter here:
Sharpe ratio: return per unit of volatility.
Sortino ratio: return per unit of downside volatility. Most investors don't mind upside volatility; they mind the falls.
Here's how some well-known alternatives compare with the S&P 500 (all ETFs, so real money you could have invested), October 2011 to October 2026:
Return p.a. | Sharpe | Sortino | Worst fall | |
|---|---|---|---|---|
S&P 500 (SPY) | 14.7% | 0.87 | 1.23 | −34% |
Nasdaq 100 (QQQ) | 20.7% | 0.99 | 1.41 | −35% |
S&P 500 Equal Weight (RSP) | 11.9% | 0.69 | 0.97 | −39% |
US Min Volatility (USMV) | 10.6% | 0.77 | 1.08 | −33% |
Sharpe and Sortino here are calculated without a cash rate, to keep the comparison simple.
There's a lesson in that table. Some alternatives did better than the S&P 500 for the risk taken. But a fund simply labelled "low volatility" didn't automatically give a better reward-to-risk. You don't get a better Sortino by buying a label. You get it by choosing individual companies whose returns have historically come with smaller falls, and checking that regularly. That's the work.
4. If you're passive, you have to sit through the falls
"Passive" sounds easy. In practice it means watching:
£100,000 turn into about £45,000 between October 2007 and March 2009 (S&P 500 with dividends, in dollar terms), and waiting until 2012 to get back to even.
A third of your money disappear in five weeks in February–March 2020.
A quarter of it go during 2022, with no recovery until late 2023.
Some people try to beat the index with leverage. A 2× daily S&P 500 fund (SSO) did beat it: about 15.8% a year against 11.4% since 2006. But it fell 85% in 2007–09 and took six years to recover. As I say to clients: it's easy to beat, but not easy to live with.
That's why, when we show model portfolios, we focus on the falls, not the gains. Assume the worst past drops will happen again, at least as badly. If you can't sleep through that, the portfolio is wrong for you, however good the long-term return looks.
5. You can beat it with other indices, so why the S&P 500?
The Nasdaq 100 has historically beaten the S&P 500. From October 1985 to today it grew about 14.7% a year against 9.5% (both price indices). There's no guarantee it will do so in future.
It also fell 83% from 2000 to 2002, and anyone who bought at the March 2000 peak waited until November 2015 to break even.
So the question isn't "which index is best?" It's this: why did you choose the S&P 500? If the honest answer is "everyone says buy it", that's a default, not a process. A process tells you what to own, why, how much, and what to do when it falls.
6. Psychology kills returns: panic selling, FOMO and no process
This is the biggest point, and the data is consistent:
Morningstar's Mind the Gap 2026: the average dollar in US funds and ETFs earned 8.7% a year over the 10 years to December 2025. The funds themselves returned 9.9%. That gap of 1.2 percentage points a year comes purely from when investors bought and sold. It's about 12% of the total return, lost to timing.
DALBAR's 2026 investor behaviour study: the average equity fund investor lagged the S&P 500 by 8.48 percentage points in 2024. In 2025 the gap narrowed to 0.72 points. It varies a lot, but it rarely goes in investors' favour.
The best days usually come right next to the worst ones. Take $100,000 invested in the S&P 500 (with dividends) on 2 October 2006:
Value on 2 Oct 2026 | |
|---|---|
Stayed invested | ~$848,000 |
Missed the 10 best days | ~$377,000 |
Missed the 20 best days | ~$223,000 |
Every one of the ten best days in that period fell in a crisis: October–November 2008, March 2009, March–April 2020 and April 2025. Those are exactly the times panic sellers are out of the market.
FOMO is the mirror image: buying after a big rise, then selling in the next fall. Daniel Kahneman and Richard Thaler won Nobel Prizes partly for showing why we do this. Losses hurt roughly twice as much as equal gains feel good, so we act on fear and greed rather than evidence.
Without a process, your emotions become your process.
How we tackle each of these on the Great Investments Programme
There's no crystal ball and no secret insider tips. What there is, is a process:
Falls and sideways markets: we look for undervalued companies with consistent growth and a high cash return on capital. These are premises drawn from academic research, including Goldman Sachs' CROCI work. And we plan for the falls: every portfolio is judged on what it did in its worst periods, including 2022, assuming you sat through it.
Knowing what you own: full transparency. For every stock you know why you own it, what it did before, and how badly it has fallen. Data, not a story.
Better reward for risk: we specifically look for companies with high historic Sortino ratios, because research suggests that tends to persist, alongside value, growth and momentum.
Sitting through falls: portfolios are sized to your risk capacity. Some members keep cash so they're never forced to sell in a down market. If you know the worst case in advance, you're far less likely to panic.
A process, not a default: five clear, research-based premises. You can read the underlying literature at investing-champions.com.
Psychology: rules instead of moods. There's a rebalancing app that weighs concentration risk, a set formula for what to do with new money, and 1-2-1 calls with me, so decisions are made calmly and with evidence.
The aim is simple: you understand what you own, why you own it, and you can sleep easily even if the worst falls happen again.
You can see the live picks we've actually given clients (not backtests) at shares.alpeshpatel.com, and read what members say at alpeshpatelreviews.com.
Want to see if the process fits you?
[Book a call with my team](https://call.alpeshpatel.com). We'll look at what you hold now, how it has behaved in falls, and whether GIP makes sense for you. If it isn't a no-brainer, you shouldn't join.
Important: This article is for education only and is not personal financial advice. The value of investments can go down as well as up, and you may get back less than you invest. Past performance does not guarantee future results. Index and ETF figures are in US dollars; currency movements affect returns for sterling investors. Data: S&P 500, Nasdaq 100 and ETF prices from Yahoo Finance to 2 October 2026; S&P 500 total return index used where dividends are stated. Index concentration from SPY fund holdings (October 2026). Morningstar "Mind the Gap" 2026; DALBAR QAIB 2026.
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