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A common theme among advice for new long-term investors is to ignore investments such as actively managed funds, be wary of financial advisers and the products they sell, and instead to just put most of your money in a low-fee index fund that tracks the S&P 500 and leave it there.

Why is this advice so frequently given? I think some of the reasons include:

  • Historically, it has been very stable and nearly impossible to reliably beat over the long term
  • The risk is low, partly because it includes a wide variety of stocks
  • It protects new investors from making common mistakes such as paying high fees or overreacting to short-term fluctuations

How much of this applies outside of the US, though? In my particular case, I'm an EU citizen mostly living in Germany. I've found what appear to be similarly-structured funds composed of European stocks (e.g. the FTSEurofirst 300 Index), but I'm not sure whether the reasons for investing in an S&P fund still apply to a fund like this. Is there something special about the S&P 500 itself—maybe historically US companies have just performed better?

How does the standard advice change when living outside of the US? Does it still make sense to invest in the S&P 500 as a foreigner, or are local equivalents better? What considerations (taxes?) are there?

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    Note that variations on the theme are common, to the degree that "S&P 500 index" appears in a plurality but probably not a majority of advice. In particular, the S&P 500 omits mid- and small-cap stocks, and many recommendations call for a balance including all three (often in a single "total stock market" index). – Ben Voigt Sep 1 '18 at 21:20
  • In particular, there are several axes to diversify across: stock vs bond (and maybe REIT), large/mid/small capitalization, value vs growth, domestic vs rest-of-world. I'd argue that the last one is a simplification of domestic, USA, rest-of-world, that occurs in the USA where the first two categories are the same. Other parts of the world should consider having a USA category due to the sheer size of the US stock market.... but you definitely want some domestic stock as well because that isn't exposed to currency risk. – Ben Voigt Sep 1 '18 at 21:28
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    Note that the common advice in the US (at least as I've heard it) is not to put everything in an S&P 500 index fund, but to have some part in an international index fund as well. There are also funds that track other market indices... – jamesqf Sep 13 '18 at 3:03
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According to the theory of asset allocation, an indexed portfolio would balance risk versus reward.

I think people often refer to S&P 500 for two reasons: 1) It's one of the earliest weighted indexes. 2) U.S. holds a big chunk (about 1/4) of world GDP.

Since EU GDP is a little more than that of U.S., I think FTSEurofirst 300 is about the same as S&P 500.

As mentioned by Ben Voigt, a total stock market index might be better than S&P 500 because it includes small and mid-cap stocks.

For international index, I would consider FTSE Global All Cap, or MSCI ACWI IMI.

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The idea of the index fund is based around two ideas: first, that it's well diversified, and second, someone else has decided what's in the index. There are other mutual funds that have a wide variety of stocks, but someone has to decide what stock to include, and that someone is going to want to get paid. With an index, a fund can "free ride" off of the already-made decision of what to include in the index, and so one can save on fees. So there isn't really anything special about the S&P 500, in the sense that if a different set of stocks had been chosen to be for the S&P 500, it would probably do about as well (assuming the stocks were chosen reasonably well), but it is special in that if you want to invest in this particular set of stocks, you can just put your money in an index fund, and if you want to invest in a different set of stocks, you're going to have to either buy each of the stocks individually or find a mutual fund that's invested in those stocks, and pay whatever company that has selected those stocks.

For the most part, this applies as much to non-US citizens as US citizens, although there are complications such as currency conversion. If you have a lot of money, you can diversify even more by splitting your money between FTSEurofirst 300 and S&P 500.

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