On the surface, investing in the stock market seems simple. The S&P 500 (SNPINDEX: ^GSPC) has generated an average annual total return of about 10% since its inception in 1957, even as the U.S. endured ten recessions. By simply investing in the S&P 500 through a low-cost exchange-traded fund (ETF) — such as Vanguard’s S&P 500 ETF (NYSEMKT: VOO) — you’ll likely outperform most individual stocks and actively managed funds over the long term.
But to reap those long-term gains, you need to stay invested through some steep drawdowns. Over the past 20 years, the S&P 500 experienced peak-to-trough declines of 57% from Oct. 2007 to March 2009, 34% from Feb. to March 2020, and 25% from Jan. 2022 to Oct. 2022. Those declines — which were caused by the Great Recession, the COVID-19 crisis, and the Fed’s rate hikes, respectively — shook many “long-term” investors out of the market.
Missed Nvidia in 2009? This Rare Signal Is Flashing Again. In 2009, a “Double Down” signal flashed for a little-known chipmaker called Nvidia. For the first time in years, that same “Total Conviction” signal is flashing for a company 1/100th the size of Nvidia. Continue »
So if you’re nervous about jumping into the stock market today, you should remember Warren Buffett’s advice to be “fearful when others are greedy and to be greedy only when others are fearful.” Let’s see why that strategy has consistently paid off for patient investors.
When should you get greedy?
In 2009, 2020, and 2022, many investors scrambled for the exits as the market crashed. But at its lowest points in those three years, the S&P 500 closed at 676.53, 2,237.40, and 3,577.03.
Today, the S&P 500 trades above 7,700 points. A $1,000 investment in the index at its 2009, 2020, and 2022 lows would have grown to $11,000, $3,800, and $2,300, respectively, with reinvested dividends. Anyone who shifted to cash would have missed out on those gains.
Do you need to time the market?
Even if you didn’t invest in the S&P 500 at those multi-year lows, you would have been fine if you simply did nothing. A $1,000 investment in the S&P 500 at the beginning of 2007, right before the Great Recession, would still be worth about $5,700 today with reinvested dividends.
All you had to do was tune out the near-term noise, automatically reinvest your dividends to take advantage of dollar-cost averaging, and have faith that the S&P 500 — which rebalances itself every quarter to always include the 500 largest companies in America — would bounce back.
