No one knows for sure that a stock market crash is coming anytime soon. However, there are several unmistakable warning signs that turbulence could lie ahead. Treasury yields are rocking multi-decade highs. Stock valuations are at frothy levels by some metrics.
What should investors do if (and it’s only an if, at this point) a stock market crash really is coming? History’s answer is both simpler and more counterintuitive than you might expect.
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The strategy with a perfect track record
There’s one investing strategy that boasts a perfect track record. First, buy a low-cost S&P 500 (^GSPC +0.41%) index fund such as the Vanguard S&P 500 ETF (VOO +0.43%) or the State Street SPDR Portfolio S&P 500 ETF (SPYM +0.45%). Second, hold it for at least 20 years.
Following this approach in the past has always made money. The S&P 500 and its predecessors have never produced a negative 20-year total return. Not even during the Great Depression, World War II, the 1970s stagflation, the dot-com bubble’s burst, or the 2008 financial crisis. Every 20-year holding period ended with a positive gain.
By the way, holding an S&P 500 fund for 10 years has nearly as impressive a record. The S&P 500 has delivered a positive return 94% of the time over any 10-year stretch since 1928.
Why does this simple buy-and-hold strategy work so well? For one thing, the stock market has gone up more than it has gone down. Market crashes have always been followed (eventually) by strong rebounds.
Reinvested dividends are important, too. Roughly 44% of the S&P 500’s total return over the last 30 years stemmed from dividends.
The “low-cost” part of this strategy also matters. The Vanguard S&P 500 ETF’s annual expense ratio is 0.03%. The State Street SPDR Portfolio S&P 500 ETF’s expense ratio is even lower at 0.02%. With such low costs, you don’t have to worry about fees eating into your gains.
An honest caveat
Every fund you buy will include a warning along the lines of, “Past performance is not indicative of future results.” The U.S. Securities and Exchange Commission (SEC) requires fund managers to include the disclaimer.
This warning applies to the strategy of buying and holding an S&P 500 index fund. There’s no guarantee that an S&P 500 fund will generate a positive total return over the next 20 years.
That said, the underlying reasons for this strategy’s successful track record are likely to hold up going forward. The stock market will probably continue to rise over the long run (even if there are a few crashes along the way). Dividends will almost certainly continue to account for a significant portion of the S&P 500’s total return.
I suspect that time in the market will beat timing the market over the next two decades — just as it has throughout history.