Up 4% in 2023, Is It Safe to Invest in the S&P 500 Right Now?
The first two and a half months of 2023 have been a mixed bag for the $S&P 500 Index(.SPX.US$ . The index, a widely used proxy for the U.S. stock market, was up nearly 4% as of March 24.
Why short-term volatility doesn't matter
The $CBOE Volatility S&P 500 Index(.VIX.US$ is known as Wall Street's fear index. Developed by the Chicago Board Options Exchange (CBOE), it measures the level of fluctuation investors predict in the S&P 500 index in the next 30 days. As of this writing, the VIX was just below 22; anything above 20 implies that traders expect higher than usual volatility in the 30 days ahead.
But short-term volatility doesn't matter to investors who stay focused on the real goal, which is building lasting wealth. History shows us that investing in an S&P 500 index fund -- a fund that tracks the S&P 500's performance as closely as possible -- is remarkably safe, regardless of timing.
The S&P 500 has never produced a loss over a 20-year holding period. And between 1950 and 2022, a 10-year holding period generated positive returns 92% of the time.
The investment mistake to avoid
There's a saying in investing: Time in the market beats market timing. Essentially, that means investing over the long haul is what generates wealth, not finding the perfect time to invest. The longer you wait to start investing, the less time your money has to compound, and that costs you big in the long run. Yet there are a number of reasons people delay investing.
Some people want to avoid investing during a stock market correction or bear market, despite the commonsense investing wisdom of "buy low, sell high." This approach is especially problematic because the market's best days often follow its worst days. And according to $Wells Fargo & Co(WFC.US$ research, missing the best 20 days of the market, based on S&P 500 data between September 1992 and August 2022, would have reduced an investor's average annual returns from 7.8% to 3.2% -- which was less than the average inflation rate during the 30-year period.
Other investors strive to time their investments once the market has bottomed out. Of course, you'll only know in retrospect when that's actually happened. The timing of your investments matters much less than you think, though.
$Charles Schwab(SCHW.US$ study examined the returns of hypothetical investors who consistently invested $2,000 each year between 2001 and 2020. An investor who had perfect timing and consistently invested $2,000 at the S&P 500's lowest closing level for the year in each of the 20 years would have had $151,391 at the end of two decades. But an investor who had impossibly bad luck and consistently invested $2,000 at peak closing level in each of the 20 years still would have seen his or her investments grow to $121,171.
Meanwhile, someone who avoided the stock market altogether and stuck with low-risk cash equivalents would have had just $44,438 after 20 years of consistent investing.
Disclaimer: Community is offered by Moomoo Technologies Inc. and is for educational purposes only.
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