Investing across the pond with our US cousins isn’t something that’s overly complicated. Most retail investing platforms offer me the ability to buy stocks on the S&P 500, the Nasdaq and other indexes. Like most stock markets this year, the S&P 500 is down. In fact, yesterday it traded down to 3,600 points, a price not seen since the end of 2020. So should I diversify my holdings and buy an index tracker?
The case for investing in the US
At a broad level, buying US stocks helps me to diversify away from the UK. Naturally, as someone who lives and works here, I’m going to have a bias towards buying companies listed on the London Stock Exchange. However, it’s also clear that the UK is struggling more than other countries right now. Our level of inflation is higher than in the US, although at the same time, our interest rate is lower.
Putting this together, investing in the S&P 500 could be a partial hedge for my portfolio in case we get a market crash in the UK. This ties in with some other thoughts I have at the moment, such as buying defensive stocks and dividend payers ahead of potentially hard times.
Another reason why the S&P 500 could be a smart buy is because it’s a mix of the largest stocks in the US. Unlike the Nasdaq, which is very tech-heavy, the S&P 500 is a broader blend of sectors. It still includes the likes of Apple and Amazon but provides some traditional names such as IBM as well.
Finally, one of the main reasons for me thinking of buying now is the fact that it hit lows not seen since December 2020. This has mainly been driven by underperformance from growth stocks, particularly tech. However, it provides a more attractive entry level. By comparison, yesterday the FTSE 100 hit only its lowest level since March 2022.
My concerns
Despite all of the above, I do have some concerns. Historically I’ve not been a huge fan of buying an index tracker. Sure, it replicates the move of the market overall. But I don’t have any scope for trying to outperform. With the S&P 500, I’m effectively buying hundreds of companies, some of which I probably wouldn’t want to buy by themselves.
A valid concern is that if the US is in a better economic position than the UK, why is the stock market performing worse? I think part of the answer is due to some sectors being overvalued in the past couple of years. For example, I was banging the drum about Tesla being overpriced for most of 2021.
These valuations are now becoming more reasonable. But that still doesn’t mean that the S&P 500 constituents are necessarily undervalued.
My take on the S&P 500
I think that now is a good time to get involved. I’m going to buy a small position in an S&P 500 index tracker. I’m using a tracker as an initial entry to the market but will ideally look for specific US stocks in coming weeks. Due to the fact that the market is still falling, I’ll look to build my exposure to the US in chunks over coming months.