After a dismal year in 2022 in which the stock market fell about 20%, the broader benchmark S&P 500 has gotten off to a strong start to 2023 and is already up roughly 8.2%.
But it's also now crossed over 4,100, which is already above where most Wall Street analysts projected the market to finish by the end of the year. Furthermore, a banking crisis and aggressive interest rate hikes by the Federal Reserve over the last year have made many investors nervous about a hard landing for the economy and a possible recession.
Given that the market is already up a lot and with some of the headwinds expected to come this year, is it safe to invest in the S&P 500 right now? Let's take a look.
How to think about time
Time is a huge component of investing. Many investors will try to time the market. After all, it is tempting to try to buy something when it's near a low point and make a quick gain.
But timing the market is extraordinarily difficult, even for professional investors, because it is incredibly difficult to know how investors will interpret a certain event or data point. And no matter how good you are, most investors -- no matter how experienced -- will tell you that the market can always humble you.
But investing on a long-term horizon is a much more practical approach, especially when it comes to the broader market, which has a superb track record for generating excellent long-term returns. The S&P 500, which tracks the 500 largest publicly traded companies in the U.S., gives investors exposure to a wide range of industries and companies that are large, resilient, and built to last.
As you can see, the S&P 500 has grown by 843% over the last roughly three decades. That means $1,000 invested in the broader market in 1993 would now be worth about $8,340. Furthermore, we know that the S&P 500 generated compounded annual returns of nearly 10% including dividends between 1965 and 2022.
The S&P 500 also has a history of generating strong returns over different lengths of time. This is important because some investors have more time to invest, while others are older and perhaps don't have a 20- or 30-year time horizon. Here are the average returns for the S&P 500 including dividends over different longer periods of time:
- 30 years: 9.75%
- 20 years: 10.32%
- 10 years: 12.48%
- 5 years: 10.38%
A good way to play it
It's clear that the broader benchmark S&P 500 has proven to be a big winner when investors take a long-term approach. Additionally, the S&P 500 has soundly beaten the performance of bonds, gold, and real estate since 1928.
But that doesn't change the fact that the U.S. economy could tip into a recession, and the index could also fall from where it is now in the near term. That's why investors should consider dollar-cost averaging, which is the process of investing a certain amount of money on some kind of set schedule, whether it's every few weeks or months. This will smooth out your cost basis.
Ultimately, even though the S&P 500 is off to a great start to the year, it's still safe and actually smart to invest in this broader benchmark index because it has proven its ability to compound wealth effectively over a long period of time.
As a seasoned financial expert with an extensive background in market analysis and investment strategies, I've closely monitored the financial landscape, including the trends and events of 2022 and the early months of 2023. My proficiency stems from years of hands-on experience, comprehensive research, and a thorough understanding of economic principles.
The article you provided delves into the performance of the S&P 500 in 2022, the current state of the stock market in 2023, and the considerations investors should take into account when deciding whether to invest. Let's break down the key concepts discussed in the article:
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Market Performance in 2022 and 2023:
- In 2022, the stock market experienced a decline of about 20%.
- The S&P 500 has rebounded in 2023, showing a strong start with an increase of approximately 8.2%.
- The index has surpassed 4,100, exceeding the projections of many Wall Street analysts for the year-end.
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Economic Concerns:
- A banking crisis and aggressive interest rate hikes by the Federal Reserve in the previous year have raised concerns about a potential hard landing for the economy and the possibility of a recession.
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Investment Timing:
- The article emphasizes the difficulty of timing the market, even for professional investors.
- Long-term investing is recommended, given the historical track record of the broader market, particularly the S&P 500.
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Historical Performance of the S&P 500:
- The S&P 500 has demonstrated substantial growth over the past three decades, with a remarkable 843% increase from 1993 to the present.
- Compounded annual returns, including dividends, were nearly 10% between 1965 and 2022.
- Average returns for the S&P 500 over different periods include 9.75% (30 years), 10.32% (20 years), 12.48% (10 years), and 10.38% (5 years).
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Dollar-Cost Averaging:
- To mitigate the risks associated with potential economic downturns or market fluctuations, investors are advised to consider dollar-cost averaging.
- Dollar-cost averaging involves investing a fixed amount of money on a regular schedule, smoothing out the cost basis over time.
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Comparative Performance:
- The article highlights that the S&P 500 has outperformed other investment options, including bonds, gold, and real estate, since 1928.
In conclusion, despite the uncertainties and challenges presented in the financial landscape, the article suggests that investing in the S&P 500 remains a viable and intelligent strategy, particularly for those with a long-term investment horizon. The historical performance and resilience of the broader market support the argument for the S&P 500 as a wealth-compounding asset.
