The S&P 500 Index has long been one of the best-known proxies for the U.S. stock market, and several mutual funds and exchange traded funds (ETFs) that passively track the index have become popular investment vehicles. These funds do not seek to outperform the index through active trading, stock picking, or market timing; instead, relying on the inherent diversification of the broad index to generate returns.
Indeed, over long-term horizons, the index typically produces better returns than actively managed portfolios, especially after taking into account taxes and fees. So, what if you had just held the S&P 500, using an index fund or some other means of holding the stocks in it?
- The S&P 500 Index is a broad-based measure of large corporations traded on U.S. stock markets.
- Over long periods of time, passively holding the index often produces better results than actively trading or picking single stocks.
- Over long-term horizons, the index typically produces better returns than actively managed portfolios.
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What Would You Do With $10,000?
What If You Had Invested in Just the S&P 500?
People often use the S&P 500 as a yardstick for investing success. Active traders or stock-picking investors are often judged against this benchmark in hindsight to evaluate their savvy.
Let's take a historical example: Soon after Donald Trump entered the race for the Republican nomination for president, the press zeroed in on his net worth. Financial experts have pegged his net worth at $2.5 billion. One of the cornerstones of Trump's campaign was his success as a businessperson and his ability to create such wealth. However, financial experts have pointed out that if Trump had liquidated his real estate holdings—estimated to be worth $500 million—back in 1987, and invested them in the S&P 500 Index, his net worth could be as much as $13 billion.
It is just one more example of how the S&P 500 Index continues to be held up as the standard by which all investment performances are measured. Investment managers are paid a lot of money to generate returns for their portfolios that beat the S&P 500, yet on average, most don't.
This is the reason why an increasing number of investors are turning to index funds and ETFs that simply try to match the performance of this index. If Trump had done so back in 1987, he would have made 26 times his money for an average annualized return of 12.3% by the time he was inaugurated (from 1987 to 2015—the date of calculation for projected net worth). But hindsight is 20/20, and he could not have known that.
$10,000 invested on the first trading day of January 2001 in the S&P 500 would have been worth around $50,900 by the end of 2021.
Using Hindsight to Predict Future Performance
Because past performance is no indication of future performance, no one can say whether the stock market will perform the same way in the next 20 years. However, you can use past performance to create some hypothetical scenarios that allow you to consider possible outcomes. To do that, look at the 20-year performance of the S&P 500 at various intervals as an indication of how it might perform under similar circumstances in the future.
One of the biggest reasons why it is impossible to predict stock market returns over a long period of time is because of the existence of black swans. Black swans are catastrophic, unexpected events that can alter the course of the markets in an instant and whose impact may be felt for years to come. Such events are called black swans because they appear so rarely, but they appear often enough that they have to be accounted for when looking into the future.
The terrorist attacks on Sept. 11, 2001, were a black swan event that impacted the economy and the markets for years. Other examples of black swan events are the global financial crisis of 2008 and the COVID-19 pandemic that erupted worldwide in March 2020.
You also have to consider the market cycles that can occur within a 20-year span. For example, in the 20-year span from 2001 to 2020, the S&P 500 had three distinct bull markets and three bear markets.
Research from Invesco shows that from the period of November 1968 through December 2020—a span of more than 50 years—the average length of a bull market was 1,764 days (or approximately 58 months), while the average bear market lasted 349 days (11.5 months). Over this period, the average gain in a bull market was +180.04%, while the average loss in a bear market was -36.34%.
A bull market is generally characterized by a market rise of at least 20% from its previous low. A bear market is defined by a market decline of at least 20% from its prior high.
Choosing a Hypothetical Scenario
The most recent 20-year span, from 2001 to 2021, not only included three bull markets and three bear markets, but it also experienced a number of major black swans with the "tech wreck" and terrorist attacks in 2001, the financial crisis in 2008, and the COVID-19 pandemic of 2020-22.
Despite these unprecedented events, the S&P 500 still managed to generate a total annual return of 8.06% with reinvested dividends. The total return over this period was 409.13%, which means that a $10,000 investment made at the beginning of 2001 would have been $50,913.05 by the end of 2021.
Taking a different 20-year span that also included three bull markets but only one bear market, the outcome is quite different. In the period from 1987 to 2006, the market suffered a steep crash in October 1987, followed by another severe crash in 2001 to 2002, but it still managed to return an average of 11.24% with dividends reinvested, which is an 8.10% inflation-adjusted return. The total return of $10,000 invested in January 1987 would have been $84,227.27. Likewise, the market roared back following the 2008 financial crisis to the longest bull run on record.
You could repeat that exercise over and over to try to find a hypothetical scenario you expect to play out over the next 20 years, or you could simply apply the broader assumption of an average annual return since the stock market’s inception, which is 6.86% on an inflation-adjusted basis. With that, you could expect your $10,000 investment to grow to $34,000 in 20 years.
Why Is the S&P 500 a Good Long-Term Investment?
The S&P 500 is one of the most widely followed proxies for the U.S. stock market. It's a bellwether and benchmark for many major funds and portfolio managers. From 1950 to 2021, the S&P 500 has yielded an annualized average return of 11.53%.
What Is an Inexpensive Way to Invest in the S&P 500?
A cost-effective way to invest in the S&P 500 is through an exchange-traded fund (ETF) like the SPDR S&P 500 ETF Trust (SPY), which has an expense ratio of 0.0945%.
Is Investing in the S&P 500 Less Risky Than Buying a Single Stock?
Generally, yes. The S&P 500 is considered well-diversified by sector, which means it includes stocks in all major areas, including technology and consumer discretionary—meaning declines in some sectors may be offset by gains in other sectors.
The Bottom Line
You may not be able to predict the performance of the S&P 500 Index for the next 20 years, but you are not alone. In one of his annual letters to shareholders, Warren Buffett included an excerpt from his will that ordered his children’s inheritance to be placed in an S&P 500 Index fund because the “long-term results from this policy will be superior to those attained by most investors—whether pension funds, institutions, or individuals who employ high-fee managers.”
Forbes. "How Rich is Donald Trump?"
S&P Global. "SPIVA Data, Results by Region."
Official Data. "Stock market returns between 2001 and 2021."
Official Data. "Stock market returns between 1987 and 2006."
Official Data. "Stock Market Returns Between 1950 and 2021."
State Street Global Advisors. "SPDR® S&P 500® ETF Trust."
Berkshire Hathaway. "2013 Shareholder Letter."
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