Dear Readers,
I thought that I should be writing about the current opportunity as I have been receiving this question from many people who had not invested before.
First and foremost, I am referring to the US market and thus, the data that I will be sharing is based on the S&P500.
What is the S&P500?
The S&P 500 – short for the Standard & Poor’s 500 Index – is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. It is not an exact list of the top 500 U.S. companies by market cap because there are other criteria that the index includes. Still, the S&P 500 index is regarded as one of the best gauges of prominent American equities’ performance, and by extension, that of the stock market overall.
Can investors buy into the Index?
It’s difficult for most individual investors to actually be invested in the S&P 500 themselves since that would involve buying 500 individual stocks. However, investors can easily mirror the index’s performance by investing in an S&P 500 Index exchange-traded fund, which duplicates the index’s holdings in its portfolio and so corresponds to its return and yield. Since ETFs are frequently recommended for beginning and risk-averse investors, the S&P 500 is a popular choice for many investors trying to capture a diversified selection of the market.
Is investing into S&P500 safe?
Generally speaking, investing in the S&P 500 is safer than buying a single stock and produces better returns than actively managed portfolios. Its broad diversification means that the decline in some sectors may be offset by gains in other sectors and, over long-term horizons, the index typically generates better results.
What is the annualised return of the S&P500?
The index has returned a historic annualized average return of around 10.5% since its 1957 inception through 2021. Of course, this mean that if you have bought the index back then in 1957 and held it (without buying and selling along the way), your annualised return will be 10.5% per annum.
Does timing the market affects S&P500 returns?
As the S&P500 is basically an index, investors can only participate in it by buying ETF or funds that are tied to the index. For example, the SPDR S&P 500 ETF Trust (SPY), which basically duplicates the index, performed very well for an investor who bought between 1996 and 2000 but experienced a consistent downward trend from 2000 to 2002.
Investors who buy during market lows and hold their investment, or sell at market highs, will experience larger returns than investors who buy during market highs, particularly if they then sell during dips.
So is it a good time now?
Let us take a look at the historical data of the S&P500.
Things to note:
- In the last 94 years since 1928, the index had only experienced 6 years that it closed more than 20%. (probability: 6.38%)
- After major pullbacks on the index, in the following year or years, the index actually recovered what was lost.
From 1929-1932, the index lost a total of 102.61%, and in 1933-1936, the index recovered 109.94%.
From 1937-1941, the index pulled back 51.98%, and from 1942-1945, the index recovered 76.40%.
From 1946-1948, the index pulled back 12.52%, and from 1949-1952, the index recovered 60.28%.
In 1957, the index dropped 14.31% and from 1958-1959, the index rallied 46.54%.
In 1962, the index dropped 11.81% and from 1963-1965, the index rallied 40.92%.
In 1966, the index dropped 13.09% and from 1967-1968, the index rallied 27.75%.
In 1969, the index dropped 13.09% and from 1970-1972, the index rallied 26.52%.
From 1973-1974, the index pulled back 47.09%, and from 1975-1976, the index rallied 50.70%.
In 1977, the index dropped 11.50% and from 1978-1980, the index rallied 39.14%.
In 1981, the index dropped 9.73% and from 1982-1989, the index rallied 116.06%.
In 1990, the index dropped 6.56% and from 1991-1993, the index rallied 37.83%.
In 1994, the index dropped 1.54% and from 1995-1999, the index rallied 131.58%.
From 2000-2002, the index dropped 46.55% and from 2003-2007, the index rallied 55.52%.
In 2008, the index dropped 38.49% and from 2009-2017, the index rallied 118.86%.
In 2018, the index dropped 6.24% and from 2019-2021, the index rallied 72.03%.
Currently, YTD based on last friday’s closed, the S&P500 is down 18.40%. Based on historical data, there is never a time that the index never recovered and eventually breaks new highs; considering all the super crisis like the WWII, the inflation problem in the 1970s through 1980s, the tech bust in 2000, the Global Financial Crisis on 2008, even the pandemic back in 2020.
No crisis is the same.
I believe that many have heard of this saying that “no one crisis is the same”. But I would like to add to that statement, human reaction to these crisis have always been the same; fear!
Crisis creates opportunities!
It is exactly this fear that caused the major selloff in stocks (assets mispricing), not simply changes on the macro-economics front. Even though data has shown that the S&P500 has always been a bull market if you zoom out the chart but investors have proven to act irrationally by selling stocks during crisis, creating mispricing in the market, indirectly creating opportunities for others.
Margin of safety
The market is offering investors “a margin of safety” which is one of the factor that famous investor Warren Buffett advocate. He got this from another famous investor named Benjamin Graham who defined margin of safety as a principle of buying a security at a significant discount to its intrinsic value, which is thought to not only provide high-return opportunities but also to minimize the downside risk of an investment.
In summary:
As we can see from historical data, the market occasionally does offer long term investors to buy assets at a discount. But the stock market is an interesting place as Warren Buffett had put it and I quote, “The stock market is the only place in the world that shoppers head for the door when the discounts starts”.
If we take the current level for both the S&P500 and NASDAQ level, the market is offering a discount of 18.4% and 26.7% respectively.
And of course, based on historical data, it has proven that the S&P500 had always recovered from all the different crisis and continues its climb, breaking new highs. There are various reasons for this and one of them is the growing global population as consumption has always been the core of all businesses. Urbanization is possibly another reason as higher income does stimulates higher value goods consumption (refer to table below).
Consumer spending attributes almost 70% of the total US production. In 2019, that figure stood at $13.28 trillion. Its important to note that personal consumption expenditures include durable goods like cars, furniture, large appliance, etc. And Non-durable goods like clothing, food and fuel and services like banking, healthcare and education.
As such, US is definitely one of the key markets that an investor should have in his portfolio. I am attaching one article that I have written lately on “investing during a crisis” here for readers to understand more.
In a nutshell, I believe that this is going to be one of the best time for new investors to start investing, enjoying some margin of safety after the recent pullbacks in global markets. If you may have any questions, you can feel free to visit the forum that I have created and I will try to answer those questions as timely as possible. I have provided the link to the forum here: FORUM LINK.
To manage risk at this time when the market is volatile, investors can buy into the market at regular intervals, which is termed dollar-cost-averaging. I have personally deployed some capital during this period of high volatility for my kids’ portfolio by breaking up their purchases into 5 parts, each part per month, from June to October, at the middle of each month. I had also attached some of my recent writeups below if you may be keen to read.
- Revision to S&P500 target for the year 2022 (Bi-annual review)
- Update: My take on a possible recession as commented by the Prime Minister
- Bananas for Fixed Depositors!
- Kopi Talk: Should You Be Fearful Of The Current Market Downturn?
- Investing in a Stock Market Crisis – A U-shaped Recovery
Hopefully, I have provided readers some insights into the past market corrections and crisis and these information will be useful in your investment journey.
Have a great week ahead!