Investment Outlook for Index Funds

The S&P 500 is an index of the top 500 companies in the US, and is a popular index for many investors because of it’s low cost and simple approach.

We think the outlook for this index in the next 10 years is quite weak because the index is expensive with a valuation that is 26 times earnings. At end of 2021 it was valued at 22 times earnings so the market has become more expensive while at the same time profit margins have fallen from 13.3% to 11.8%

At times like this when the market is expensive it is usually a bad time to hold a basic index like the S&P 500 that allocates to companies based on market size. Expensively priced companies get a larger allocation at times like this and we have 7 companies making up almost 40% of the S&P 500.

Astute investors such as Christopher Bloomstram believe the next 10 years could be similar to the 10 years following 1999 dot com crash where the S&P 500 was negative over a 10 year period.

But it is not all doom and gloom. We are positioned as always with defensive growth which we expect to be more resilient which constitutes:

• Evidence Based Indexes which allocate based on more fundamental factors such as profit, and cheap share price.

• International Investment. The US market is expensive but other markets look cheap.

• Investment funds/companies such as Berkshire Hathaway that have a lot of cash to be able to buy companies for a bargain when the opportunities present themselves.

This approach performed much better in the 10 years following 1999, and it is an approach that we expect to be smoother ride, which helps our clients to avoid the mistake of selling up at a bad time and realising losses.

Ultimately, a basic index is ok over 20 years although we think it leaves money on the table, and we don’t think it is a wise investment choice at a time when the market is expensive.