S&P 500 vs. Nasdaq 100: Long-Term Investment Strategy and Tax Optimization

Comparing average returns over the past ten years, the S&P 500 recorded 15% while the Nasdaq recorded 20%. Kim Chae-seong stressed that this gap has an enormous effect as it compounds.

He advised that if you are young, can look at a longer upswing, and can endure volatility, you should weight more toward the Nasdaq. Conversely, he added that if you are a beginner or prefer stable investing, the S&P 500 is more suitable.

The US market was assessed as having high long-term stability. Kim Chae-seong analyzed that investors' belief that the market will trend upward over the long run when US corporate earnings are strong is stronger than in the Korean market. This means the US market earns greater trust from investors.

Kim Chae-seong stressed that investors should flexibly invest wherever money is to be made, not confined to a single market. He explained that it is important to adjust investments according to conditions in each market, such as real estate, domestic stocks, and US stocks. He advised that managing assets with a balanced view, rather than insisting on one market in black-and-white terms, is advantageous for generating returns.

Kim Chae-seong noted that no signs of a US economic slowdown or earnings decline are appearing, and analyzed that the rally, once concentrated in specific tech stocks such as semiconductors, is spreading to the broader market. In particular, since most of the companies leading technologies such as AI are American, he judged such growth likely to continue over the long term. He added that shifting assets to the US market could be a good strategy from a long-term perspective.

This raises the stability of the asset portfolio, and it also offers the advantage of potential extra gains if the exchange rate rises later. He explained that a strategy to respond to market uncertainty through dollar assets is necessary.

Kim Chae-seong explained that the S&P 500 has recorded an average return of 15% over the past ten years, and the current sideways trend is faithfully following that average. Although the S&P 500 may look lackluster compared with the surge in the KOSPI, he analyzed that it is steadily following its own path.

The roughly 8% drop in the exchange rate over the past month or two offers an opportunity for US stock investors. Kim Chae-seong explained that starting US stock investing now, as the rate has fallen from the 1,530 won range to the 1,410 won range, could bring additional currency gains if the rate rebounds. His analysis is that combining S&P 500 share-price gains with currency gains could produce considerable extra returns.

Unless you go all in with your entire fortune at once, he suggested that a strategy of steady, staggered buying remains valid. This implies it is important to take a long-term view rather than reacting to short-term market volatility.

He advised that if you are just starting and fear losing principal, the S&P 500 should be your core holding, because it can be expected to deliver relatively stable performance. On the other hand, he stressed that if you can withstand market declines with your salary and other income and believe tech-led growth will continue, long-term investing in the Nasdaq will bring much higher returns. He highlighted that since this is an era of tech stocks, the Nasdaq's potential is large.

Compared with the end of 2021, his assets dropped by about a quarter to a third, a difficult period, but he said his assets have now recovered. He implied that through this experience he directly went through market volatility.

Kim Chae-seong explained that there are countless such stocks in the Nasdaq market, and that the Nasdaq index itself moves about 1.5 to 2 times more violently than the S&P 500 index. This implies that when investing in the Nasdaq, diversifying risk through index investing is more important than holding individual stocks.

Kim Chae-seong said that looking at the numbers alone, one should invest in the Nasdaq, but he pointed out that when tech-stock issues arise, the Nasdaq's decline can be several times that of the S&P 500, so volatility is high. He explained that therefore, as high as the returns are, how well you can withstand market swings is the key to Nasdaq investing.

He advised that it is wise to build market experience by gradually raising the weight in the S&P 500, then gradually broaden knowledge through study and increase exposure to more aggressive investments. He stressed that rather than choosing difficult investment approaches from the start, a beginner who takes the stable path will be better served for long-term investing success.

He explained that the current KOSPI movements are at a level investors find hard to endure with index investing. This implies that index investing in the Korean market is difficult for stable long-term investing due to high volatility.

He analyzed that it is uncertain whether a bubble has formed in the market, but that after one sharp rally it is going through a period of some correction and stabilization. He added that there are still attractive elements that make it too early to completely ignore the market.

Unless you use tax-advantaged accounts such as an ISA or IRP, US index ETFs listed domestically can involve complicated tax calculations. Kim Chae-seong mentioned that in such cases, investing directly in US stocks may be better. He explained that which method is more advantageous may vary depending on the individual's income situation or investment goals.

When you invest directly in the S&P 500 and realize gains, up to 2.5 million won per year is tax-free, and above that a 22% capital gains tax applies. By contrast, gains from trading a domestically listed S&P 500 ETF are subject to a 15.4% dividend income tax with no separate deduction. He stressed the importance of understanding the tax structures of these two approaches and choosing accordingly.

Kim Chae-seong explained that once financial income passes 20 million won, in addition to the 15.4% dividend income tax on domestic ETFs, you may have to pay roughly 8% in extra health insurance premiums. In that case, the total tax burden becomes larger than the 22% capital gains tax on direct investing. He advised that for high earners in particular, whose income tax bracket is already 35% or higher, adding the health insurance burden can make domestic ETF investing disadvantageous, so considering direct US stock investing is reasonable.

Kim Chae-seong suggested varying how one invests in US stocks depending on personal salary level. He explained that for those earning roughly 80 million to 100 million won a year, direct US stock investing is more likely to be tax-advantageous. Conversely, he advised that for those earning less than that or without much in assets, domestically listed ETF investing may be slightly more advantageous. He stressed the importance of a tailored strategy that considers the investor's income situation.