Even as the S&P 500 index posts the worst week since April this week, the index is still doing very well in 2024.
The index is still up 16% this year and hit a new all-time high 38 times this year. To put things in perspective, the index recorded 0 all-time high in 2023 and only 1 all-time high in 2022.
When the index is doing well, retail investors tend to sit on the sidelines and wonder if they should be investing in the market.
Some retail investors worried that they made "bad investment decisions" and bought into the index at an all-time high. Declining or even negative returns following their investments become their biggest concerns.
If you are thinking so, this article is a reminder that compound interests (being the eighth wonder of the world) will save you from your "bad investment decisions".
Let's start off with the basics.
Above is a snapshot of the S&P 500 index over the past 3 decades or so. You can see clearly that the long term direction of the index is clear. It's an uptrend. Throughout these 3 decades, we have seen global financial crisis, oil crisies, wars, political instability during certain time periods etc. Despite everything that happens, the trend has always been up. So even if you invest at an all-time high, there is always the next all-time high.
When we dig into the specifics, you will also realise that statistics are in your favour when it comes to investing in the index. From 1951-2023, the percentage of up days for the S&P 500 index is 53.6% while the percentage of down days for the S&P 500 index is 46.4%. In short, there are more up days than down days. And this happens in all market conditions over long periods of time, be it bull or bear.
What if you happen to be the worst investor of all times and just happen to invest at an all-time high each time?
You might expect your investing results to be dismal, but that's actually not the case.
An exercise was done to show two hypothetical investments in the S&P 500 index over a 20-year period ending 31 December 2023. In each of these two scenarios, the investor each has $10,000 to invest every year. The first investor is the best market timer and manage to pick the best time (market low) of each year to invest his/her $10,000. The second investor is the worst market time and only manage to pick the worst time (market high) of each year to invest his/her $10,000.
At the end of the 20-year period, both made money. And you will be surprised that the difference isn't as much as you are expecting.
The first investor (the one who buys at the best time) has an average annual return of 12.64% while the second investor (the one who buys at the worst time) has an average annual return of 10.78%. That is a barely 2% difference even in these extreme conditions. Most of us are probably somewhere in between and you could probably expect the difference to be even lesser when you compare your performance to the first investor. If you want the full results, you can refer to the article here.
This is all due to compound interest. Your time in the market beats timing the market anytime.
The S&P 500 index only returns negative annual return in 27% of the past 96 years. This means that the market returns positive returns in almost 3 out of every 4 years.
Hence, when you hold your investments over a long time period, you are very likely to see positive returns (see the infographic below)
The only other asset which provides better results than this is Bitcoin. And this is also the reason why I believe Bitcoin is a strong long-term asset to have in your portfolio.
Now, going back to the original intention of this article. In case you are wondering if you should still invest despite the market having such a good year YTD, I think you already have your answer from these data.
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