The S&P 500 Has Delivered Impressive Long-Term Returns, but Bear Markets Are Unavoidable. History Has Repeatedly Proven That Exiting Too Early Often Means Missing the Generous Gains From Subsequent Rebound. Whether Investing in Index Funds or Individual Stocks, Maintaining Patience and Riding Out Volatility Is the Key to Sharing in the Long-Term Growth of the U.S. Economy. Investing in Low-Cost Exchange-Traded Funds (ETFs) That Track the S&P 500, Such as the Vanguard S&P 500 ETF (VOO), Is a Sound Long-Term Strategy. Since Its Inception in 1957, the Benchmark Index Has Delivered an Average Annual Total Return of About 10%, Outperforming Most Individual Stocks and Actively Managed Funds Over the Long Run.
However, Since 1957, the S&P 500 Has Experienced Ten Official Bear Markets, Meaning Market Declines of at Least 20% From Peak to Trough, Occurring Roughly Every Six to Seven Years. Bear Markets Have Lasted Only Nine to Ten Months on Average, but These Sharp Declines Have Often Driven Many Investors Out of the Stock Market. Therefore, If the Next Bear Market Is Expected to Be Approaching, the Best Way to Respond Is to Stay Put and Ride Out the Storm. This Key Investment Decision May Determine the Success or Failure of a Portfolio.
In 1987, the S&P 500 Suffered a 33.5% Peak-to-Trough Decline From August to December, Including the “Black Monday” Crash on October 19. From March 2000 to October 2002, as the Dot-Com Bubble Burst and the September 11 Attacks Struck the Economy, the S&P 500 Plunged 49.1%. From October 2007 to March 2009, the Great Recession Caused the S&P 500 to Fall 56.8%. From February to March 2020, the Pandemic Caused a 33.9% Decline. From January to October 2022, as the Federal Reserve Sharply Raised Interest Rates to Curb Inflation, the S&P 500 Fell 25.4%.
But Since the Beginning of 1987, the S&P 500 Has Still Achieved a Total Return of 6,377%. Since the Beginning of 2007 and 2009, Its Total Returns Have Been 669% and 1,112%, Respectively. Investors Who Exited the Market Too Early Missed These Huge Gains.
The S&P 500 Is Rebalanced Quarterly and Includes Only the 500 Largest U.S. Companies. By Keeping Only the Winners and Removing the Losers, Investors Can Always Share in the Long-Term Growth of the U.S. Economy. This Passive Strategy Is Wiser Than Moving Money Into Certificates of Deposit, Short-Term Treasury Bills, and Other Fixed-Income Investments Because of Rising Interest Rates.
The Same Logic Applies to Individual Stocks You Favor. Warren Buffett Once Told Investors That If You Buy a Stock, You Should Be Prepared to “Tolerate It Falling 50% or More and Be Comfortable With That.” If You Cannot Do That, You May Miss Out on Substantial Gains.
