For more than two years, the bulls have been running wild on Wall Street. The ageless Dow Jones Industrial Average, benchmark S&P 500 (^GSPC 1.33%), and growth stock-dominated Nasdaq Composite have all, respectively, reached multiple record-closing highs.
But there are also reasons to believe this epic rally in equities could come to an abrupt halt. The first notable drop-off in U.S. M2 money supply since the Great Depression in 2023, the longest yield-curve inversion in history, and the S&P 500's Shiller price-to-earnings ratio hitting one of its highest multiples in 154 years, are all examples of historic precedent and correlations coming into play.
Investors regularly look to these historic markers to decipher which direction the stock market might head next. Nevertheless, there is no concrete way to forecast short-term directional movements with 100% accuracy.
There is, however, one investment strategy that's been foolproof since the start of the 20th century, and it's closest thing you're going to get to a guarantee as an investor on Wall Street.
Image source: Getty Images.
Perspective is everything
The one factor that can swing the outcome pendulum for investors more than anything else is their investment horizon. Looking at things through a narrow lens or stepping back and examining at the big picture can have dramatically different results.
For instance, the economic cycle teaches us that periods of expansion and recession are both perfectly normal and inevitable. But while downturns in the economy can be scary at times, they're historically short-lived.
Since the end of World War II in September 1945, the U.S. economy has navigated its way through 12 recessions. The average length of these recessions is only 10 months.
In comparison, the typical economic expansion has stuck around for roughly five years. While pessimists are, eventually, going to be correct, investors who wager on the U.S. economy to expand over time are more likely to grow their wealth on Wall Street.
We see this same cyclical disparity at work in the stock market.
In June 2023, the analysts at Bespoke Investment Group released a data set that calculated the average length of every bull and bear market for the S&P 500 dating back to the beginning of the Great Depression in September 1929. Whereas the average bear market was resolved in 286 calendar days (about 9.5 months), bull markets endured for an average of 1,011 calendar days (roughly two years and nine months).
Perspective is everything when putting your money to work on Wall Street -- and it's a necessary trait to take advantage of the most foolproof investment strategy.
Image source: Getty Images.
This investment strategy has a 100% success rate when back-tested to 1900
Among Wall Street correlations, none is more powerful than the long-term performance of the benchmark S&P 500.
Every year, the analysts at Crestmont Research update their data set that examines the rolling 20-year total returns (including dividends) of the S&P 500. Even though the S&P didn't officially exist until 1923, Crestmont was able to track the performance of its components in other major indexes prior to 1923. This allowed researchers to back-test their total return data to the start of the 20th century.
Crestmont Research examined the 20-year total annualized return for 106 periods (1900 to 1919, 1901 to 1920, and so on, through 2005 to 2024). What this data showed was that all 106 timelines generated a positive annualized total return.
^SPX data by YCharts. Gray areas denote U.S. recessions. Chart doesn't go back further than 1950.
Hypothetically -- I say "hypothetically," because index funds that attempt to mirror the performance of the S&P 500 didn't exist prior to 1993 -- if an investor had purchased an S&P 500 tracking index at any point since 1900 and simply held onto their position for 20 years, they would have made money. It doesn't matter if they purchased at a recent stock market high or held through the Great Depression, Black Monday, the dot-com bubble, or Great Recession, they would have ended the 20-year rolling period with far more than their initial investment.
It's worth pointing out that these weren't small gains, either. Roughly 90% of these rolling 20-year periods produced an annualized total return of at least 6%, while half yielded annualized 20-year total returns ranging from 9.3% to 17.1%. In other words, investors would have been doubling their money in less than eight years in half of these 106 rolling 20-year periods.
Here's the easiest way you can take advantage of the stock market's closest thing to a guarantee
The great news is investors can fully take advantage of this nearly guaranteed moneymaking opportunity thanks to exchange-traded funds (ETFs).
As of this writing, there are two dozen ETFs that attempt to mirror the performance of the broad-based S&P 500. The two that have rightly garnered the most attention (and assets) are the SPDR S&P 500 ETF Trust (SPY 1.22%) and Vanguard S&P 500 ETF (VOO 1.34%).
NYSEMKT: VOO
Key Data Points
Both the SPDR S&P 500 ETF Trust and Vanguard S&P 500 ETF purchase all 503 securities that comprise Wall Street's benchmark index. Although the S&P 500 is comprised of 500 companies, three businesses have two classes of stock, which is why there are 503 components to this prized index.
What differentiates these two index funds is their net expense ratios -- i.e., the management fees investors pay, minus any discounts or fee waivers. The SPDR S&P 500 ETF Trust has a net expense ratio of roughly 0.09%. On the other hand, the Vanguard S&P 500 ETF sports a net expense ratio of just 0.03%.
On paper, six basis points doesn't amount to much. But when you're talking about investing a large amount of money, or holding over a 20-year period, this six-basis-point difference can add up.
For instance, if you hypothetically invested $1 million into each of the SPDR S&P 500 ETF Trust and Vanguard S&P 500 ETF and generated an annualized return of 7% over 20 years, you'd have $3,805,105 with the SPDR S&P 500 ETF Trust's higher net expense ratio and $3,848,043 with the Vanguard S&P 500 ETF's lower net expense ratio. This six-basis-point difference would equate to almost $43,000!
Considering both ETFs serve the same purpose, the Vanguard S&P 500 ETF is the smartest way to take advantage of the closest thing you have to a moneymaking guarantee on Wall Street.
