One of the hardest things for new investors to come to terms with, and one of the reminders tenured investors regularly need, is that stocks can go down just as easily as they can climb.
In 2021, the iconic Dow Jones Industrial Average (^DJI 0.43%), broad-based S&P 500 (^GSPC 1.06%), and innovation-driven Nasdaq Composite (^IXIC 2.03%), set multiple all-time closing highs and benefited immensely from an abundance of cheap capital tied to the COVID-19 pandemic.
In 2022, it was a different story. Historically high inflation coerced the Federal Reserve to put an end to the cheap capital gravy train by hiking interest rates at the quickest pace in more than 40 years. The end result was the Dow Jones, S&P 500, and Nasdaq Composite all dipping into a bear market and producing their worst annual returns since 2008. The velocity of downside moves that accompanies bear markets has a lot of investors rightly wondering when the volatility will slow and a new bull market will emerge.
The good news is that if history continues to repeat itself, long-term-minded investors have absolutely nothing to worry about.
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Statistically speaking, the stock market spends a disproportionate amount of time climbing
Chances are that the average investor doesn't realize just how common stock market corrections are. According to data from sell-side consultancy firm Yardeni Research, the benchmark S&P 500 has undergone 39 double-digit declines since the start of 1950. On average, we're talking about a decline of at least 10% every 1.88 years in a little over 73 years. In other words, notable declines are fairly common.
But you know what else can be penciled in like clockwork? A bounce back to new all-time highs in the Dow, S&P 500, and Nasdaq. Even though we'll never know ahead of time when a stock market correction, crash, or bear market will begin, how long it'll last, or where the bottom will be for these major U.S. stock indexes, history is quite clear that all three eventually recoup their losses, with patience being the key ingredient needed from investors.
What's more, history has also shown that it pays to be optimistic, even when the tide has turned in the short run. Roughly one year ago, I took the time to calculate the aggregate number of calendar days the S&P 500 has spent expanding versus correcting since the start of 1950 (once again using data from Yardeni Research). For every one calendar day spent in correction, the S&P 500 has enjoyed 2.6 calendar days of expansion. This disproportionate period of expansion is just begging investors to put their money to work and be patient.
This investment strategy hasn't failed after 1900, and it's Wall Street's closest thing to a guarantee
However, Yardeni isn't the only research company to provide compelling data for long-term investors. A study I often cite from market analytics company Crestmont Research provides a look into an investment strategy that's been nothing short of foolproof since the start of the 20th century.
What Crestmont Research did was analyze what a fictitious investor would have netted in total returns -- that's including dividends paid -- if they'd purchased an S&P 500 tracking index and held on to that position for 20 years. Crestmont examined every single rolling 20-year holding period beginning in 1900, which left the company with 104 ending years' worth of data (1919-2022).
The results of its study showed that every ending year -- 104 out of 104 -- generated a positive total return. No matter when you purchased an S&P 500 tracking index after 1900, you made money -- as long as you held on to that position for 20 years. It's about as close to a guarantee as you'll get on Wall Street.
What's more, Crestmont Research's dataset showed that, in many instances, holding for 20 years would have crushed all other asset classes and the prevailing U.S. inflation rate. Only a handful of the 104 ending years produced an annualized return rate of 5% or less. Comparatively, around half of these 104 ending years delivered an annualized rate of return of between 9% and 17.1%.
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It's easy to take advantage of this practically foolproof investment strategy
Although investors aren't able to directly purchase shares of a major market index like the S&P 500, exchange-traded funds (ETFs) make it easy for investors to take advantage of this seemingly surefire investment strategy.
Two of the most-prominent ETFs that attempt to mirror the performance of the S&P 500 are the Vanguard S&P 500 ETF (VOO 1.07%) and SPDR S&P 500 ETF Trust (SPY 1.01%). Both funds own shares of every company listed in the S&P 500 and have historically done an excellent job of very closely matching the returns of the large-cap S&P 500 index.
The one notable difference between the two can be seen in their net expense ratios. The net expense ratio describes the percentage of invested assets that you'll owe annually to cover a variety of management fees.
Although the SPDR S&P 500 ETF Trust has a low net expense ratio of 0.09%, the Vanguard S&P 500 ETF sports an ultra-low 0.03% net-expense ratio, as of April 28, 2023. This means you'll only be doling out $0.30 in fees for every $1,000 invested, which is negligible for a fund tracking an investment vehicle that has a proven track record spanning for more than a century.
Though most investors would love to "beat the market," simply matching the broader market's long-term returns might be all that's needed to achieve financial independence.
