Retirees: Is Now the Time to Pull Money Out of S&P 500 Index Funds?
Key Points
Investing in S&P 500 index funds has long been seen as a safe way to invest over the long haul.
The index, however, has high exposure to tech right now.
For retirees, there may be safer options to consider.
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If you're in or near retirement, a top investing priority is likely going to be preserving the capital you've built up over the years. It's a time to scale back some risk and focus on stability and dividend income.
While investing in index funds that track the S&P 500 have performed well over the long term, seasoned investors also know that it can take several years to recover from a crash, and that no downturn is the same. That unpredictability could make it risky to invest in the index, despite its long-term stability, because the reality is, you may not have the luxury of just waiting around for it to recover from a downturn, should one take place. And currently, the S&P 500 is around record highs.
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Could moving money out of S&P 500 index funds be a good move for retirees to make right now?
Image source: Getty Images.
Why the S&P 500 looks risky
The SPDR S&P 500 ETF Trust (NYSEMKT: SPY) tracks the S&P 500, and the one thing that stands out when looking at the exchange-traded fund (ETF) is how much exposure it has to tech. Roughly 38% of its holdings are in the tech sector. And all of its top 10 holdings are involved in tech and have exposure to artificial intelligence (AI). If the AI bubble bursts, the fund could have tremendous downside risk.
The diversification the S&P 500 offers can also be a bit misleading, as the communication services sector, which accounts for about 10% of the index, includes stocks investors might consider tech-related, such as Alphabet and Meta Platforms. Thus, the overall risk and exposure to tech in the S&P 500 may be higher than it appears to be at first glance.
Investors can look to other options to reduce risk
While the S&P 500 might seem like the default option for long-term investing, there are plenty of other investments to consider. ETFs that focus on dividends and value stocks, for instance, make for more practical investments. The Schwab U.S. Dividend Equity ETF is a terrific example of a fund that may be more suitable for retirees and risk-averse investors, as it focuses on safe dividend stocks and offers a solid yield of around 3.3%.
Taking money out of S&P 500 index funds and putting it into safer funds and investments may be a prudent move for retirees to make right now, and it can be an effective way to drastically reduce your overall risk.
Should you buy stock in SPDR S&P 500 ETF Trust right now?
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David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Meta Platforms. The Motley Fool has a disclosure policy.
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