The S&P 500 delivered a 16.3% return, excluding dividends, in 2020. The year before that, it was lights out, up 28.9%. So far, in 2021, it’s up 0.5% through February 1.
Over the past 10 years, the index has delivered seven years of positive returns, two years of negative returns, and one year (2011), which was essentially flat. Since 1928, the index has had three or more consecutive years of losses on just three occasions — 1929 to 1932 (4), 1939 to 1941 (3), and 2000 to 2002 (3) — highlighting why investing in the SPDR S&P 500 ETF Trust (NYSE:SPY) is a simple, but effective, long-term investment vehicle.
I know. You’ve heard this piece of advice millions of times from all kinds of financial experts, including Warren Buffett. However, because it’s not nearly as exciting as investing in GameStop (NYSE:GME), you tune out the sage advice.
Using the three occasions where stocks fell for an extended period, I’ll show you why the SPY remains the best way for most people to accumulate wealth over the long haul.
It might be boring, but it works.
The S&P 500 Worst-Case Scenario
Since 1928, the index has delivered negative annual returns 29 times, positive annual returns 62 times, and basically flat on two occasions. That’s a 67% success rate. If you’re a baseball player, that gets you into the Hall of Fame.
Over the next 93 years, let’s assume that the index has double the number of periods where it experiences three or more years of negative consecutive returns.
The 3 Down Periods (Consecutive) From 1928-2020
| Period | Average Return |
| 1929-1932 (4 years) | -25.7% |
| 1939-1941 (3 years) | -12.9% |
| 2000-2002 (3 years) | -15.5% |
| Average | -18.0% |
Based on 29 years of negative annual returns — 10 being consecutive years of three or more — if you add 10 years of negative returns, the next 93 years would include 39 years of negative returns, 2 flat, and 52 years of positive returns.
The negative returns averaged a loss of 14.7% over the 29 years. Add in 10 years of losses at -18.0%, and you get an average loss on the 39 down years of 15.6%. The 62 up years between 1928 and 2020 averaged a positive annual return of 18.6%.
Take $10,000 and generate a loss of 15.6% over 39 years. It would be worth approximately $13.41. Now, take $10,000 and generate a positive return of 18.6% over 52 years, and you would have $71.2 million.
So, even by doubling the number of times the index falls for three or more consecutive years, you still make out like a Rockefeller.
Buy SPY on the Dips
How many times do you think SPY fell by more than 5% in a single week in 2020?
The answer: Four. Five if you include the week of May 26 to June 2, when it was down 4.7%. Here are the other weeks of negative returns:
Feb. 24 to Feb. 28 = -11.2%
March 9 to March 13 = -9.5%
March 16 to March 20 = 15.0%
Oct. 26 to Oct. 30 = -5.6%
So, if you invested $10,000 in SPY at the beginning of 2020 and bought $1,000 on Friday of each of those weeks, you’d have a book value of $14,000.
What do you think your market value would have been at the end of 2020? To calculate that number, I’ll use the Friday high for all four weeks. I’m not bothering with commissions and all that. It’s merely for illustrative purposes.
Feb. 28. High of $297.89 = $1,000 divided by $297.89 = 3.4 units
March 13. High of $271.48 = $1,000 divided by $271.48 = 3.7 units
March 20. High of $244.47 = $1,000 divided by $244.47 = 4.1 units
Oct. 30. High of $329.69 = $1,000 divided by $329.69 = 3.0 units.
Assuming you acquired your $10,000 of SPY on Dec. 31, 2019, high of $322.13, you would have started 2020 with 31.o units. Add in 14.2 units acquired in 2020, and you get a market value of $16,813.95 based on the Dec. 30, 2020, close of $371.99.
That’s an annual return of 20.1%, excluding dividends. A basic $10,000 investment, including dividends, would have delivered an annual total return of 17.7%.
The biggest downside to this kind of plan is that you would have been buying all the time in 2008.
How many times do you think SPY was down for an entire calendar month in 2020? Twice. In February and March.
How many times do you think SPY was down for an entire calendar month in 2008?
Six. January, February, May, August, September, and October.
Six trades in a year are hardly difficult. Nor would it be too financially taxing for someone saving a significant portion of their paycheck for investments.
The Bottom Line
Dollar-cost averaging is very popular in the financial planning community. Given technology today, it’s definitely an easy plan to implement. By all means, do so if you don’t have the patience or time to buy on the dips.
However, after 2020, it’s easy to see why buying-on-the-dips works, especially for a broad-based index like the S&P 500.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.