The S&P 500 (^GSPC 0.38%) is the U.S. stock market's most followed and important index, tracking the 500 largest public U.S. companies. Its performance is often used to gauge the performance of the overall U.S. stock market.
After entering bear market territory and dropping more than 18% in 2022, the S&P 500 has had a turnaround so far this year, gaining almost 15%. Because the index's performance has gone against much of the recession speculation and economic uncertainty over the past year, investors may wonder if it's safe to invest in the S&P 500 right now.
The direct answer is yes. The better answer is that that's the wrong question to ask.
A better question to ask
Instead of asking if it's safe to invest in the S&P 500 right now, you should be asking how much you should be investing in the S&P 500 right now if you have the financial means.
More times than not, when you start asking if it's safe to invest in a stock (especially if you currently own it), you're leaning on the side of trying to time the market. In this case, it could either be hurrying to invest to benefit from the current run or holding off on investing, expecting a drop at any given moment.
Unfortunately, trying to time the market is counterproductive because nobody can predict what the stock market will do. This applies to both individual and institutional investors. Investors can make educated guesses based on history or indicators, but nobody knows for sure what will happen.
Once you know how much you want to invest in the S&P 500, consider using dollar-cost averaging to help with the urge to time the market. When you dollar-cost average, you invest a set amount at predetermined times, regardless of stock prices. Having a schedule should ideally keep you from investing solely based on current trends.
Time in the market is more important
History shows that the amount of time you are invested is typically more important than trying to time the market.
As an example, imagine you invested $10,000 in the S&P 500 on Dec. 31, 2007, and left it until Dec. 31, 2022. At that time, it would've been worth more than $35,400. Here's how that same $10,000 investment would look based on how many of the S&P 500's best days you missed.
| Number of Best Days Missed | Annualized Total Return | Value of $10,000 Investment |
|---|---|---|
| 0 | 8.81% | $35,461 |
| 10 | 3.29% | $16,246 |
| 20 | (0.17%) | $9,748 |
| 30 | (2.93%) | $6,399 |
| 40 | (5.32%) | $4,401 |
Data source: Putnam Investments / Best days defined as largest single-day gains
Even missing 10 of the best days over 15 years was enough to drop the investment value by nearly $20,000. Missing out on 20 was enough to cause you to lose money. You don't want to wait for the seemingly right time and miss out on potential gains.
You could argue that there's a chance you'll miss out on some of the market's worst days too, but that goes back to timing the market. You want to avoid it from both sides.
Embrace the inevitable
Money is already an emotional topic for many people. Investing, and the inherent risks that come with it, can often add to these emotions. One way to help keep your peace as an investor is to embrace the inevitable, and in the stock market, that's volatility.
The stock market as we know it has always been volatile and will likely continue to be that way. As a long-term investor, you have to keep your eyes on the long-term prize and expect (and embrace, in most cases) the inevitable bumps along the way.
Assuming the long-term results are there, it doesn't matter too much what happened en route to those results.
