It’s a provocative title, I’ll admit. But I’m not writing this to scare you away from index funds, and I’m certainly not telling you to sell! In fact, if you’ve followed Gelt Guide for any length of time, you know that I consider the S&P 500 to be one of the greatest inventions in the history of modern finance.
I’ve spent years encouraging people, whether they have $1,000 or $10 million, to trust the long-term power of the modern investment markets. This isn’t gambling in a casino if you treat it with cautious respect.
But today, that cautious respect for the market’s power is waning. Success breeds overconfidence, and several years of exceptional market performance have convinced many people that the S&P 500 is a “can’t lose” savings account.
The Problem: A Tool Used Wrongly
But it isn’t. The broadly diversified stock index fund is a high-performance investment vehicle with a powerful engine. And like an excellent car, if you ignore its limitations or drive like a maniac, that very power can hurt you badly, chas v’shalom.
Let me share three examples that concern me.
1. The Aggressive Almanah Portfolio
I recently spoke to a young almanah, with a full house, who was under immense pressure from a relative to move her entire savings pot into the S&P 500 because “that’s where the returns are.” She was being guilted for keeping her money in a safe, conservative portfolio.
This relative’s approach would be a classic misuse of growth investments. When you need to withdraw cash from a portfolio every month to pay for groceries and tuition, you cannot afford to have 100% of your money in investments that can drop 30% in a month! The S&P 500 is a long-term growth engine, not a short-term income producer.
2. Gambling With “House Money”
Similarly, a young fellow in the midst of necessary renovations to his modest house asked me about swapping the designated funds from his high-yield savings account into the S&P 500.
Yes, he needed to spend down these funds within the next couple of months, but…
“It’s been returning 15-20%. Isn’t it baal tashchis to leave it in a high-yield savings account?”
I asked him:
“What will you do if the market plunges? And you’re left mid-construction without sufficient funds? Is that a scenario you can live with?”
A similar question applies to the many, many couples who feel the stock market is a good place to park their down payment money.
3. The Leverage Trap
The one that truly demonstrates overconfidence? People are borrowing against their homes or using margin debt (a form of loan against liquid investments) to buy more stocks. They are taking a real estate investor mindset, where leverage is standard, and applying it to the stock market.
But risking the roof over your head to buy stocks is a very aggressive financial move. As far as margin, real estate leverage works because the bank doesn’t call your loan just because the appraised value of your house dipped 15% on Zillow. But in the stock market, if your portfolio drops, the lender can and will liquidate you at the bottom.
The Reality of the “Crash”
When I say the S&P 500 will crash, I’m not making a prophecy; I’m reminding you of typical historical norms.
Corrections (a 10-20% drawdown) and Bear Markets (greater than a 20% drawdown) are fairly common. See this interesting chart from Oakmark.
Falls of 5-10% are too frequent to even chart here. But as you can see, even double-digit drawdowns aren’t rare. And if you’re selling during these falls, you’re locking in losses that are difficult to recover from.
The S&P 500’s Lost Decade
Fairly recently, in the 2000s, we had the “Lost Decade.” (See the cart below.)
An “irrationally exuberant” tech bubble popped in 2000-2001. This bear market saw the S&P 500 fall by 47%. It took about 5 years to recover, and then, WHAM. Investors got absolutely pulverized AGAIN in 2008-2009 with a 55% collapse!
If you started the decade with $10,000 in the S&P 500, you ended it with about $9,000, despite your patient agonizing travails. The tech-heavy QQQ, meanwhile, fell by over 80% from its top peak and took 15 years to return to its starting point.
A widow drawing money from a 100% stock portfolio during that decade would likely have seen her assets run down to pennies on the dollar. Those counting on stock market savings for a home down payment or a wedding would have found themselves short-handed. And any levered stock portfolio crashed and burned.
How’s Your Risk Tolerance?
Are you prepared, financially and emotionally, to wait 3, 5, 10, or even 15 years to break even on your investment? All the while riding a wild rollercoaster of gains, losses, recoveries, and the inevitable wild headlines? Are you so sure that you won’t end up buying high emotionally and then selling low emotionally? Millions of investors do that regularly. Are you certain that you have the financial and mental fortitude not to?
Admittedly, the 2000s were one of the worst decades in history for the S&P 500. But today’s market has certain similarities to that wild time.
Either way, if the answer to the above questions is no, then you do not belong in the stock market, even in a diversified fund as trustworthy as the S&P 500.
The “Armchair Warrior” Effect
Now, the earlier chart of historical collapses does reinforce that MOST of the time, the US stock market has recovered from downturns fairly quickly! Over longer periods of 10-15 years, the market has historically always come back, stronger than ever. The S&P 500 is tried and tested, which is why it’s rightfully earned the confidence of long-term investors.
But don’t overestimate your emotional equilibrium either! It’s easy to say you’re an unemotional long-term investor when the sun is shining, after years of double-digit returns. At this heady period, some convince themselves to throw the dice, even on shorter time frames, and even to borrow to double- and triple-down on the “safe” no-brainer market. As they say in the military, everyone has a plan until they start getting shot at.
Sure You Won’t Crack?
Consider Joel Greenblatt, a well-known, highly sophisticated professional investor. In the book “The Big Short”, which discusses the investors who profited from the great financial crash, it is noted that even a money pro like Greenblatt cracked under the pressure in 2008 and was desperate to bail out of a carefully placed strategy at the crucial time.
When the world feels like it’s ending, your brain starts whispering, “This time is different.” And that’s true even for investment professionals.
Johnnie-come-lately investors who jump into the S&P 500 casually will probably end up like my friend, ES. A disciplined saver who was “conservatively” invested in the S&P 500 and got burned badly in the 2000–2009 decade of stock booms and dooms.
By then, he’d had enough. He declared the stock market a gambler’s casino and moved everything he had left into bonds. The tragedy? He abandoned stocks just as we entered one of the greatest bull markets in history, and bought bonds just before they suffered their worst decade on record.
If you are not prepared for the realities of the investments you choose, you will end up with poor results.
Four Practical Lessons
Again, I love the S&P 500 as an investment tool, and I’m definitely NOT telling you to sell your investments. As I will explain in an upcoming article, trying to time the market will almost always leave you with less money versus just closing your eyes and staying the course.
These are my takeaways:
1. SPY is NOT a Short-Term Product
If you need the money in less than five years, for income, a wedding, a house, or a business venture, it does not belong in the S&P 500. Period. Short time horizons plus volatility equals forced selling, and forced selling is how to turn a “paper loss” into a permanent one.
2. Don’t Lever Stocks
Uncontrolled leverage removes your ability to wait out negative volatility. It turns you into a “forced seller.” And that’s why borrowing is a bad approach for virtually all stock investors.
Even Warren Buffett, the GOAT investor, avoided buying stocks on margin. Stocks don’t generate enough income to carry your debt. And if the market goes sideways, your lender won’t care about your “long-term plan.”
3. Diversify (The “Yashlish” Rule)
In good times, diversification feels like a drag on your returns. When one part of your portfolio is doing spectacularly well, you look at the other components and ask yourself, “Why do I own this junk?!”
Chazal teach us the concept of Yashlish—dividing one’s means into thirds (traditionally, safe land, lucrative business, and liquid cash). Portfolio diversification is about refusing to bet everything on one single story.
4. Stay the Course
Choose a balanced, well-designed portfolio, and stick with it. Most underperformance isn’t caused by the market; it’s caused by the investor. We panic, we hop strategies, and we abandon the plan at the moment of maximum pain.
Staying the course is a pre-commitment. You have to decide now what you will do when the market drops 30%. Because it will. Sooner or later.
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