Why S&P500 and not Nasdaq?

[now-well]

Hey there,
    I'm new into the investing part of being a Mustachian. But I'm pretty well at saving. So after reading at least all firs year of this blog, I started investing.
   Now my question to the advance people here:

Looking at the history of the different indexes, (as can be seen here https://docs.google.com/spreadsheets/d/1hNqdavkptHL9m9MjJodpAXIzb4c5WlH5fpuEqosaFZ0/edit?usp=sharing) (At the end is the average of all three indexes)

Why not invest in a fund/ETF that follows Nasdaq instead of S&P 500?

As far as I can see the historic return of the Nasdaq is quite better than the S&P 500.. What I'm missing?

[dude]

In a word, VOLATILITY.  The Nasdaq is a collection of small-cap companies, many of which won't be around 5 years from now.  A select few, like the Dells, Microsofts and Apples of the world, will rise to greatness.  Yes, the returns are a bit higher, but so is the risk (as measured by standard deviation).  The S&P 500 are the blue-chips.  The guys that have been around a while, many paying dividends like clockwork for decades.  They form the backbone of the stock market.  But why choose between them?  You can own a TSM (Total Stock Market) fund that captures both.  Or you can invest in two separate funds that do the same, weighted in a way you find appealing (the S&P accounts for 80% of market cap, so a market weighting would have 80% S&P 500, 20% small cap fund).

[Eric]

Porque no los dos?

Also, past performance does not equal future returns.  Just because the NASDAQ beat the S&P over the last 40 years doesn't mean that it will over the next 40.

[now-well]

In a word, VOLATILITY.  The Nasdaq is a collection of small-cap companies, many of which won't be around 5 years from now.  A select few, like the Dells, Microsofts and Apples of the world, will rise to greatness.  Yes, the returns are a bit higher, but so is the risk (as measured by standard deviation).  The S&P 500 are the blue-chips.  The guys that have been around a while, many paying dividends like clockwork for decades.  They form the backbone of the stock market.  But why choose between them?  You can own a TSM (Total Stock Market) fund that captures both.  Or you can invest in two separate funds that do the same, weighted in a way you find appealing (the S&P accounts for 80% of market cap, so a market weighting would have 80% S&P 500, 20% small cap fund).

Right now I can only invest in TD Canada Trust Funds (and NOT their e-series), and as far as I know they don't have a TSM. That's why the options I'm thinking about where S&P500 80%, Nasdaq 20%.
Since Nasdaq is a collection of small-cap companies, wouldn't this be like investing in "80% S&P 500, 20% small cap fund" as you mentioned?

[NoStacheOhio]

Right now I can only invest in TD Canada Trust Funds (and NOT their e-series), and as far as I know they don't have a TSM. That's why the options I'm thinking about where S&P500 80%, Nasdaq 20%.
Since Nasdaq is a collection of small-cap companies, wouldn't this be like investing in "80% S&P 500, 20% small cap fund" as you mentioned?

Yes-ish. Nasdaq is also tech-heavy, so you wouldn't necessarily be getting small companies in some of the more boring industries. I like boring companies, boring companies are good.

[Metric Mouse]

Porque no los dos?

Also, past performance does not equal future returns.  Just because the NASDAQ beat the S&P over the last 40 years doesn't mean that it will over the next 40.

Wouldn't that be true of any market? "The S&P has gone up for 40 years... doesn't mean it will for the next 40."  "The market has returned 7% gains after inflation for 40 years." - doesn't mean it will continue. Does that mean no one should invest in the market? Or just not in the NASDAQ? None of what has been stated is really actionable advice.

In a word, VOLATILITY.  The Nasdaq is a collection of small-cap companies, many of which won't be around 5 years from now.  A select few, like the Dells, Microsofts and Apples of the world, will rise to greatness.  Yes, the returns are a bit higher, but so is the risk (as measured by standard deviation).  The S&P 500 are the blue-chips.  The guys that have been around a while, many paying dividends like clockwork for decades.  They form the backbone of the stock market.  But why choose between them?  You can own a TSM (Total Stock Market) fund that captures both.  Or you can invest in two separate funds that do the same, weighted in a way you find appealing (the S&P accounts for 80% of market cap, so a market weighting would have 80% S&P 500, 20% small cap fund).

Right now I can only invest in TD Canada Trust Funds (and NOT their e-series), and as far as I know they don't have a TSM. That's why the options I'm thinking about where S&P500 80%, Nasdaq 20%.
Since Nasdaq is a collection of small-cap companies, wouldn't this be like investing in "80% S&P 500, 20% small cap fund" as you mentioned?

I see the NASDAQ as a great way to add diversity to ones portfolio, exactly as you say. I also don't see anything intrinsically wrong with making a bet that a tech heavy composite will outperform a more traditional portfolio over the coming 40 years.  Good luck!

[tooqk4u22]

I just looked at the charts of the Nasdaq composite vs. S&P 500 and the results are staggeringly different over almost any time period except for if you bought nasdaq composite at the peak of the dot com bubble.   

It seems that when markets go down the nasdaq and SP500 go down in lock step but when growth re-emerges then nasdaq takes off.

Its possible you are on to something here presuming of course that the newer/younger growth companies continue to be listed on nasdaq and the past not the future stuff.

But it makes sense if the Nasdaq attracts the newest highest growth companies to its exchange for listing.....the S&P 500 is mostly comprised of lower growth, mature companies....but it really isn't an apples to apples comparison, more of a sector/risk tolerance discussion.

Setting that aside, I have used vanguard total market but to pick up the small caps/growth cos but because of the weighting of the large cos it basically tracks the SP500. 

[boarder42]

just invest in VTSAX and get the full stock market in america.

the top funds preached here isnt the S&P 500 index its the Total US stock market index.

[Eric]

Porque no los dos?

Also, past performance does not equal future returns.  Just because the NASDAQ beat the S&P over the last 40 years doesn't mean that it will over the next 40.

Wouldn't that be true of any market? "The S&P has gone up for 40 years... doesn't mean it will for the next 40."  "The market has returned 7% gains after inflation for 40 years." - doesn't mean it will continue. Does that mean no one should invest in the market? Or just not in the NASDAQ? None of what has been stated is really actionable advice.

How is it not actionable?  The action is not to buy something solely based on past returns.  It doesn't mean don't invest.  The first sentence, although in Spanish, is "Why not both?", meaning invest in both.  I thought that was fairly obvious!  Should I have added a specific investment?  Fine.  VTSAX is my recommendation.