After a dismal year in 2022 in which the stock market fell about 20%, the broader benchmark S&P 500 has gotten off to a strong start to 2023 and is already up roughly 8.2%.
But it's also now crossed over 4,100, which is already above where most Wall Street analysts projected the market to finish by the end of the year. Furthermore, a banking crisis and aggressive interest rate hikes by the Federal Reserve over the last year have made many investors nervous about a hard landing for the economy and a possible recession.
Given that the market is already up a lot and with some of the headwinds expected to come this year, is it safe to invest in the S&P 500 right now? Let's take a look.
How to think about time
Time is a huge component of investing. Many investors will try to time the market. After all, it is tempting to try to buy something when it's near a low point and make a quick gain.
But timing the market is extraordinarily difficult, even for professional investors, because it is incredibly difficult to know how investors will interpret a certain event or data point. And no matter how good you are, most investors -- no matter how experienced -- will tell you that the market can always humble you.
But investing on a long-term horizon is a much more practical approach, especially when it comes to the broader market, which has a superb track record for generating excellent long-term returns. The S&P 500, which tracks the 500 largest publicly traded companies in the U.S., gives investors exposure to a wide range of industries and companies that are large, resilient, and built to last.
As you can see, the S&P 500 has grown by 843% over the last roughly three decades. That means $1,000 invested in the broader market in 1993 would now be worth about $8,340. Furthermore, we know that the S&P 500 generated compounded annual returns of nearly 10% including dividends between 1965 and 2022.
The S&P 500 also has a history of generating strong returns over different lengths of time. This is important because some investors have more time to invest, while others are older and perhaps don't have a 20- or 30-year time horizon. Here are the average returns for the S&P 500 including dividends over different longer periods of time:
- 30 years: 9.75%
- 20 years: 10.32%
- 10 years: 12.48%
- 5 years: 10.38%
A good way to play it
It's clear that the broader benchmark S&P 500 has proven to be a big winner when investors take a long-term approach. Additionally, the S&P 500 has soundly beaten the performance of bonds, gold, and real estate since 1928.
But that doesn't change the fact that the U.S. economy could tip into a recession, and the index could also fall from where it is now in the near term. That's why investors should consider dollar-cost averaging, which is the process of investing a certain amount of money on some kind of set schedule, whether it's every few weeks or months. This will smooth out your cost basis.
Ultimately, even though the S&P 500 is off to a great start to the year, it's still safe and actually smart to invest in this broader benchmark index because it has proven its ability to compound wealth effectively over a long period of time.
