Long-term investors have enjoyed a decade of winning in the stock market. Of course, there have been bumps along the way but nothing like we’re experiencing right now.
From the February highs just a month ago to this week’s low, the S&P 500 has shed an astounding 32.8%, while the Volatility Index has soared to levels not seen since the financial crisis.
Covid-19 has sparked panic among the public, and a glance at their 401(k)s and investment portfolios aren’t doing them any favors. But, as TheStreet’s Jim Cramer has said for years, no one has ever made a dime panicking.
In fact, doing the exact opposite is what will make investors plenty of dimes in the future - provided they have the financial means to continue or increase their regular contributions.
Buyers of stock funds or ETFs, be it the SPDR S&P 500 ETF (SPY) - Get SPDR S&P 500 ETF Trust Report, the PowerShares QQQ ETF (QQQ) - Get Invesco QQQ Trust Report or otherwise, have done very well over the years. That’s despite the 1987 crash, the tech boom/bust in the early 2000s and the financial crisis in 2008.
Let’s dig deeper.
Stocks Win Over the Long Term
Right now, long-term investors need some reassurance, because we haven’t seen this type of volatility in more than a decade. And many steady investors are still reeling from the impact that 2008-09 had on their portfolios. It can be difficult to stay the course amid turbulent times, but it’s the right move.
Going back seven decades to the start of 1950, the S&P 500 has generated a 7.82% compound annual return. That doesn’t seem like much, particularly at a time where the market is down about four times that figure in just a few weeks.
However, it’s what drove the S&P 500 from 16.6 at the start of 1950 to more than 3,200 by the end of 2019. Not too shabby right? Have a look at the annual chart above. It highlights stocks’ long-term trajectory.
You’ll also notice the skew toward up years vs. down years. In that span of 70 years, the S&P 500 experienced 56 years in which the index rose vs. 19 years in which it fell. Guys, that is a 78.5% “win rate” - something you would never find at a casino.
Also during that stretch, equities only saw one stretch with three straight down years. A majority of the time, equities win. That’s not an excuse to take outsized stock-related risks, but it’s a reminder that steady, consistent investing has historically worked out for investors. This time may be different, but long-term holders should still be rewarded.
Lastly, look at this monthly chart of the S&P 500, which includes the horrible crash of 1987. At the time, it felt like the world was ending. 33 years later and its peak-to-trough decline of about 110 points equates to about a 4.5% move now. Think of the investors who sold their holdings and stopped contributing after that event, and all of the gains that they missed out on in the ensuing years and decades.
The old saying of “time in the market is more important than timing the market” rings especially true when looking at the graphic above. This too shall pass, even if there’s more pain to come in the short term.