The Big Picture
We are going to let you in on one of the worst-kept investing secrets, but one that needs to be put out there time and again. The S&P 500 is an unbelievable wealth-generating machine.
Sure, it can suck the life and wealth out of you at times, but more often than not, it breathes life and wealth into the portfolio of investors who have the benefit of time on their side.
There's nothing hyperbolic about that claim. There is empirical data to support it.
70% over the Last 70
In the sports world, a record above .500 is considered a "winning record." A lifetime batting average above .300 is a ticket to Hall of Fame enshrinement. Tiger Woods won roughly 22% of his starts and is regarded in many circles as the greatest golfer of all time.
It is hard enough to become a professional athlete, let alone win consistently at the highest level of your sport. Tom Brady appeared in 10 Super Bowls. He won seven of them for a .700 winning percentage. That is an extraordinary winning percentage on the game's biggest stage -- even a New York Giants fan would have to admit that, and the Giants delivered two of Brady's three Super Bowl losses.
You know what the winning percentage of the S&P 500 is over the last 70 years? It is 70%.
Between 1953 and 2023, there were 21 years when the S&P 500 registered an annual decline in price or finished the year flat. It's not a perfect track record by any means, but with the S&P 500 hitting an all-time high this past week, it is not an index that wallows long in losing pity.
Over that 70-year period, there were only three instances (1969-1970, 1973-1974, and 2000-2002) when it suffered consecutive losing years (and just barely in 1970 when it lost 0.07% after declining 11.36% in 1969).
The 2000-2002 period, admittedly, was a doozy as the dotcom bubble popped. It took several years to reclaim all of those losses, only to see them fall by the wayside again in the Great Financial Crisis when the S&P 500 declined 38.5% in 2008.
Again, it took several years to recover what was lost in that 2008 crash, but recover the S&P 500 did, just like it did after the COVID crash of 2020.
Timing Is of the Essence
We have shared similar perspective over the years in this column, acknowledging that an investor shouldn't try to time the market, but that timing is a critical element when it comes to the stock market.
To that end, the timing of the dotcom crash was terrible for anyone who had just retired in 1999. It was not bad timing for your author, who was in his late twenties then and had more investing time on his side.
It is important to make that distinction so as not to sound Pollyannaish about the stock market. It isn't always a winning proposition, and when it goes down, it often goes down a lot faster than it goes up. Moreover, it takes more to make up the ground that was lost. For instance, a move by the S&P 500 from 5,000 to 4,500 is a 10% decline, but to get back to 5,000 from 4,500 takes an 11% gain.
One thing that history has shown, however, is that the S&P 500 always recovers. It just takes longer in some periods than others, but it always recovers thanks to the earnings power of publicly listed companies.
This is an important reminder today as some market participants fret about the semblance of an AI bubble forming and the market-cap-weighted S&P 500 sporting a premium valuation.
With gains in 16 of the last 18 weeks, and an approximately 25% gain over that span, it stands to reason that the S&P 500 is due for a pullback, if not a correction generally defined as a 10% pullback from a prior high.
So, if there is a near-term cash need that can only be met by selling stocks, then timing will be of the essence when it comes to a risk-reward assessment. Would one be willing to chase a reward of maybe another few percent in the near term if the risk is a possible 10% correction (or more) in the near term?
Every individual investor has to answer that question for themselves based on what they know their near-term cash needs are going to be if their only outlet for raising cash is to sell stocks. So, again, timing matters at specific times just as much time matters for long-term investment success.
What It All Means
Fidelity recently reported that it saw an 11.5% year-over-year increase in 2023 amongst its account holders who became 401(k) millionaires, emphasizing that their path to millionaire status was paved by "staying the course and taking a long-term approach."
Market conditions, of course, also helped. The S&P 500 gained 24.2% in 2023, but staying the course with regular contributions over the years and a dollar-cost averaging approach left the newly-minted 401(k) millionaires in a favorable position to capitalize on that move.
You won't see gains like that every year -- or even in most years. The average gain over the last 70 years is just under 9.0%, according to FactSet. If you had a 9% return every year, your investment would roughly double every eight years using the Rule of 72 (take 72 and divide by the expected rate of return to determine how long it will take an investment to double).
Investing in the stock market is not a zero-risk proposition. The historical record shows, however, that investing in the S&P 500 Index is a risk worth taking if one can stand the test of time -- and you will be tested.
It is natural, with the S&P 500 sitting at record highs, after a 25% gain in a short period of time, to think that a test of some kind is coming. In that light, an investor will need to weigh the timing for when they might need their stock investments to be a source of funds against the time they have to keep investing in a time machine that is great in generating wealth.
