2023-03-13 09:00:00 ET
Summary
- History has proven that investing in the S&P over the long-term will create significant capital appreciation regardless of inflation.
- We have only seen the market decline for 3 consecutive years twice and have declining back to back years only 8 times since 1928.
- I prefer VOO to total market funds as it has created more upside over the years and I feel long term investors will do well if they just keep buying.
2023 started out strong as the Vanguard S&P 500 ETF ( VOO ) increased by 9.42% by 2/2/23, VOO gained $32.95 per share in the first month of the new year, but since 2/2/23, shares have fell -5.9% to $360.36. The market continues to be dependent on every piece of economic data, especially when Jerome Powell speaks to anticipate how high rates will be pushed to combat inflation. There are many viewpoints and opinions on the best way to combat inflation, but it's undeniable that the main tool at the Fed's disposal is the Fed Funds Rate. Many are now anticipating a 50 bps increase rather than .25 bps, and 2023's early gains are fading away. While nobody likes to see their balances decline, long-term investors shouldn't worry about the short-term as continuously buying has proven to be an optimal strategy when looking at S&P index funds, specifically VOO. History has proven that eventually the markets will recover, and investors who bought shares during the declines will be rewarded.
Investing in the S&P 500 has always been a long-term winner and this time the outcome shouldn't change
It's still early in 2023, as Q1 hasn't even ended. Nobody can predict where the market will end this year, and we have to make the best investment decisions with the information at our disposal. The S&P 500 has had 26 years in the red since 1928 (28.57%), and it's very uncommon for back-to-back negative years to occur. Since 1928, the S&P 500 declining YoY sequentially has only occurred 8 times (8.79%). After Jerome Powell's live testimony, higher rates for longer is a real possibility, and rates going to 6% aren't out of the question as this commentary solidified a hawkish sentiment. There is no question that the Fed is trying to slow the economy, and higher rates will not be a bullish scenario for the market in the short-term.
Investing in individual equities can generate larger returns than index funds if you pick the right stocks and time the markets correctly, but investors have done quite well taking a hands-off approach and just investing in VOO. There is no exact science or correlation between higher inflation and lower market returns. Below is an inflation chart going back to 1975, and I drew the line at 5%. The first time we had 3 consecutive down years in the market since 1939-1941 was 2000-2002. Inflation was under 4% from 2000-2002 and receded to under 2%, yet we had 3 consecutive years of negative returns. From 1975 to roughly 1982, inflation was above 5%, and there were only 2 negative years in the market, 1977 as the market declined -6.98% and 1981 as the market declined -4.7%. Inflation is grabbing the headlines, and was coming off of a down year, but the market ultimately appreciates over long periods of time, making investments such as VOO a hands-off approach to growing capital.
No matter what the inflation rate was or where in the economic cycle we were, over time, gross domestic product ((GDP)) has always risen. GDP measures the value of the final goods and services produced. Rising GDP is critical for the market because it means economic output is increasing. Going back to 1960, GDP has expanded, and even though there were periods of contraction, GDP has faced minimal declining periods.
Going back to 2000, there have been 6 years of declines in the S&P 500. From 2000-2003, we saw 3 consecutive years of declines. If you're looking at the long-term, as in multi-decades, those 6 years of declines since 2000 doesn't matter. If you had invested $10,000 in the S&P in March of 2000 and added $100 per month since then, your total capital investment would be $37,500, and your portfolio balance would be $114,249.67 for an annualized return of 7.61%. By continuously buying, you add shares throughout every stage of the business cycle, which has been a proven way to grow your capital over time.
Why I prefer VOO to VTI
Some investors prefer total market funds to S&P funds due to the broader base of holdings. The Vanguard Total Market ETF ( VTI ) is one of the most popular total market funds, but it's underperformed VOO over the past decade. By investing $10,000 in VOO rather than VTI , over the past decade you would have generated an average annual rate of return of 11.70% from VOO compared to 11.33% from VTI. By reinvesting the dividends, the $10,000 investment would have grown into $30,236.51, which is an additional $986.76 compared to the $29,249.75 that the same investment in VTI would have grown into. This works out to an additional 9.87% on invested capital.
VOO is one of the largest index funds, and ETFs in the market, with $754.1 billion in net assets. VOO has 507 positions, and the median market cap for one of its holdings is $160.2 billion. VOO charges 0.03% for its management fee compared to a 0.80% average expense ratio from similar funds. I am cheap when it comes to investing in ETFs, and the management fee spread is a huge advantage to your investible capital. For every $10,000 invested in VOO, Vanguard would have charged you $71 in management fees over a ten-year period. This is a savings of $1,756 compared to the average expense ratio of similar funds from other companies, which charge 0.78%.
Ultimately, I prefer VOO because it focuses on America's largest companies. VOO utilizes a well-balanced approach and allocates capital across 11 sectors of the economy, which include Communication Services, Consumer Discretionary, Consumer Staples, Energy, Financials, Health Care, Industrials, Information Technology, Materials, Real Estate, and Utilities. It's hard to complain about the results of VOO over the past decade, considering it's a hands-off approach to investing.
Conclusion
Inflation won't last forever, and investing isn't a short-term game for most people. It's very hard to time the market, and sell in and out of positions. Time and time again, it's been proven that investing in an S&P 500 index fund will generate capital appreciation over the long-haul, no matter when you buy. VOO is my favorite index fund, and I prefer it to total market funds. We have never seen the market decline for more than 3 years in a row, and declining back-to-back years is also uncommon. Long-term investors shouldn't focus on the Fed, or any of the noise and allow the market to do the work for them. If you have a long time horizon and keep buying VOO history would suggest that your investment will grow even if 2023 and 2024 aren't optimal investing conditions.
For further details see:
VOO: Long Term Just Keep Buying Regardless Of The Fed