With certain market valuation metrics flashing warning signs and a few high-profile investors calling for a stock market crash, now can be a scary time to invest in stocks. However, it shouldn’t be.
Yes, Michael Burry, who previously called the housing collapse, has called for a major correction, as has billionaire hedge fund manager Ray Dalio. At the same time, the CAPE ratio is at roughly the same level as before the dot-com crash, while Warren Buffett’s favorite valuation metric (the total market cap of U.S. stocks divided by U.S. GDP) is at a historic high. This has led to a lot of nerve-wracking headlines lately.
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However, in times like this, it would be prudent to follow the advice of one of America’s greatest fund managers, Peter Lynch. As the manager of Fidelity’s flagship Magellan Fund, Lynch racked up an astonishing 29.2% annual average return during his long tenure, and he was never afraid of a bear market. In a 1995 essay in Worth magazine, he famously said, “Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves.”
In the article, Lynch noted that if you had invested the same amount every year on Jan. 1 from 1965 until 1994, the year before the article was written, it would have returned an average annual rate of 11%. However, if you had invested at the market peak each year, your average return would be only slightly lower, at 10.6%. As such, he concluded that: “[i]n the long run it doesn’t matter whether your timing is good or bad. What matters is that you stay invested in stocks.”
With that in mind, let’s look at four exchange-traded funds (ETFs) to dollar-cost average into whether a stock market correction is coming or not.
The Vanguard 500 ETF
If you decide you only want to invest in one ETF, the Vanguard S&P 500 ETF (NYSEMKT: VOO) would be my first choice. It gives investors an instantly diversified portfolio of the country’s 500 largest stocks, and has a track record that is hard to beat. In fact, over the past decade, only 14% of actively managed large-cap U.S. funds have beaten the index.
With an average annual total return of 15.7% over the past 10 years, this is a must-have core holding.
