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3 Reasons Why Now Is the Time to Own the S&P 500

The U.S. election campaign is, thankfully, just about over with nothing left for Americans to do but vote, and with the FBI dropping the case against Hillary Clinton regarding her infamous emails, U.S. stocks are ready to rebound.

If you don’t already have some U.S. equities in your portfolio, hedged or unhedged, such as iShares S&P 500 Index Fund CAD Hedged (TSX:XSP) or Vanguard S&P 500 Index ETF (TSX:VFV), now is the time to own the S&P 500.

Nine consecutive days down

The S&P 500 hasn’t closed lower for nine consecutive days since 1980, just days after Ronald Reagan was elected president. Thirty-six years have passed since the former California governor handily beat Jimmy Carter to return the Republicans to the White House.

While the index has seen deeper and far more damaging market corrections—the S&P 500 has lost 3.1% since the losing streak started October 25—it does provide investors who’ve yet to invest in U.S. equities with a good entry point.

Regardless of whether you feel the Republicans or Democrats are going to win the election—most polls suggest a narrow margin of victory for Clinton—it’s important to have an equity portfolio that’s diversified not just by sector or type or size, but also by geography.

U.S. stocks are 51% of world’s market cap

“Reformed Broker” blogger and financial planner Josh Brown had an interesting post over the summer about home country bias. He compared five different countries and their investors’ tendency to put too much of their equity portfolio in domestic stocks rather than diversifying on a more global basis.

Out the U.S., Canada, the U.K., Australia, and Japan, only the Brits did a reasonable job of investing outside their own country. The U.K. accounts for about 7.2% of the global market cap, while the British allocate 26.3% of their equity portfolios to domestic equities.

Here in Canada we allocate 59% of our equity portfolios in domestic equities despite the fact our market cap represents just 3.4% of the world’s total. Meanwhile, our neighbours to the south put 79.1% of their equity portfolios into U.S. stocks–1.6 times the U.S. contribution (50.9%) to the world’s total market cap.

I can’t tell you what portion of your portfolio should be in U.S. stocks or ETFs, but it should definitely be higher than zero. An ETF linked to the S&P 500 would be a good place to start.

What if Trump wins?

The world is not going to end should Trump prevail in the U.S. election. Back in 2008 after the markets cratered, it was pretty hard to imagine stocks being where they are today; yet here we are with the S&P 500 at 2,118–210% higher than its March 2009 low.

What will happen one year or three years from now is anyone’s guess, but what we do know is that the S&P 500’s average annualized total return over the last 100 years is approximately 6.8%. Time in the market is the true recipe for success.

Worry all you want about Mr. Trump, but corrections like the one we’ve just seen over the last nine days provide regular investors like you and me an opportunity to buy the S&P 500 at a discount.

As Warren Buffett says, “be fearful when others are greedy and greedy only when others are fearful.”

 

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Fool contributor Will Ashworth has no position in any stocks mentioned.

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