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Unveiling the Power of Long-Term Investing: A Comprehensive Analysis of Historical Market Trends

In last month’s article, I addressed a common question… “Is now a good time to invest?” I referenced in that article that over the past 20+ years, investors could always find a reason to stay away from the markets. The reasons to avoid investing included events like the fallout of the Global Financial Crisis, the Dot-Com bubble, Trade Wars, the War on Terror, and even different biological concerns like the Ebola and Coronavirus epidemics. Yet, despite all of these events, the annualized return of the S&P 500 Total Return Index was about 7%. While I think that just that piece of information is powerful, it only captures one window of returns from 2000-2023. What about all the other years and combinations? 

To answer that question, and hopefully learn more about if now is a good time to invest, I expanded my research backward. I gathered index information back to 12/31/1988 and noted the year-end S&P 500 Total Return Index values to 12/31/2023. I then calculated the cumulative return for a one year period (ie. 12/31/1988 to 12/31/1989 or 12/31/2000 to 12/31/2001). There are 35 individual one-year return periods. I then repeated this step for every two-year period, every three-year period, and so on until I calculated the single 35 year cumulative return from 12/31/1988 to 12/31/2023. The results were actually fascinating. Here are a few of the highlights…

  • There were 630 return periods from 12/31/1988 to 12/31/2023
  • Of those 630 periods, only 35 had a negative cumulative return, or about 5.5%
  • If the holding period exceeded 10 Years (11+ Years and more) there were 0 negative cumulative returns
  • There were 325 11+Year return periods (11-35 Year return periods)
  • Negative return periods were clustered around the GFC and the Dot-Com bubble

Possibly one of the most important observations that can be gathered from the data is that owning a broad diversified index for years can increase your chances of positive returns. In any given 1-5 year return period over the past 35 years, the data suggests that investors had about a 10-20% chance of experiencing a negative cumulative return. The data suggests that chance drops to about a 2-8% chance when return periods are 6-10 years in length. After 11+ years, investors did not experience negative cumulative returns. That’s not to say they did not or could not lose money in any given year, but their built-up returns stay positive. This is not a guarantee of what investors will experience moving forward, but just an analysis of the past. I have to remind everyone reading this, that past performance is not indicative of future results. 

Additionally, this data is an excellent illustration of how survivorship bias can help an investor invest in a broad market index. Survivorship bias is when a visible successful subgroup appears as the entire group. In this case, over the past 35 years, many companies were formed and subsequently went out of business, yet the index continued its long-term trend upwards. Only the survivors remain in the index while all the unsuccessful companies drop out. This allows long-term investors to continually ride the winners without having to actually identify the individual companies. 

I want to be clear that this is a backwards-looking analysis of the past 35 years. The next 35 years could look different than the past did. It’s not a guarantee that simply holding an investment for a long time will make it profitable. This is a look at how investors could have fared over the past 35 years if they invested in the S&P 500 Total Return Index and held that for varying time frames. It’s also a very important illustration of how long-term investors can benefit from investing regardless of when they begin. To answer the initial question, “Is now a good time to invest?”, it really depends on your time horizon. If you have a decent amount of time, the answer is probably yes. If you’re under 10 years to your time horizon, it most likely is still a good time to invest, but finding the right mix of investments outside of just a stock portfolio becomes more important. If you need help identifying the right mix, feel free to reach out to us to make sure you’re set up correctly.