On Paper, This Investment Strategy Has Been a Foolproof Moneymaker for Over a Century

On Paper, This Investment Strategy Has Been a Foolproof Moneymaker for Over a Century

On Wall Street, the only guarantee is that virtually no guarantees exist. Directional movements for Wall Street’s major stock indexes — the Dow Jones Industrial Average (DJINDICES: ^DJI), S&P 500 (SNPINDEX: ^GSPC), and Nasdaq Composite (NASDAQINDEX: ^IXIC) — are highly unpredictable over short periods.

Since this decade began, the Dow Jones, S&P 500, and Nasdaq Composite have bounced back and forth between bear and bull markets in successive years. While it’s fun to gain perspective on historical correlations with various economic data points and money-based metrics, it’s impossible to know with 100% accuracy which direction the major indexes will move next.

However, perspective changes everything. Though guessing what’ll happen over the next day, week, month, or year offers investors no guarantee, one investment strategy that leans on time as an ally has delivered positive returns, on paper, without fail, for more than a century.

Image source: Getty Images.

History can offer promise or peril: It’s your choice

For traders with a short-term mindset, history isn’t always going to be their friend. For instance, downturns in the U.S. economy and stock market are inevitable. There have been 12 U.S. recessions since the end of World War II in 1945.

Similarly, the benchmark S&P 500 has undergone 40 separate double-digit corrections since the start of 1950, based on data from investment strategies firm Yardeni Research. This works out to a stock market correction, on average, every 1.85 years.

But history is a two-sided coin that very much favors investors who are looking to the horizon. While recessions are, indeed, a normal and inevitable aspect of the economic cycle, they’re also short-lived. Out of the 12 recessions that have taken place since September 1945, only three have made it to the 12-month mark. Furthermore, none of these remaining three surpassed 18 months in length.

In comparison, most periods of expansion have lasted multiple years. In fact, two periods of growth ultimately reached the decade mark. While Wall Street and the U.S. economy aren’t joined at the hip, a growing economy often correlates with rising consumer and enterprise spending, as well as an increase in corporate earnings.

It’s a similar story when examining bull and bear markets on Wall Street. Although the S&P 500 has endured 40 corrections over the past 74 years, it’s eventually (key word) recouped its losses every time. Despite never knowing ahead of time when downturns will begin, how long they’ll last, or how steep the ultimate decline will be, history pretty conclusively demonstrates that every double-digit downturn has been a buying opportunity for long-term investors.

^SPX Chart

^SPX Chart

This investment strategy has delivered for investors, without fail, since 1900

However, these data sets are really just a tease for what can be considered the closest thing to a guaranteed, moneymaking investment strategy on Wall Street.

Every year, the analysts at Crestmont Research update an extensive data set that examines the rolling 20-year total returns, including dividends paid, of the benchmark S&P 500. Though the S&P didn’t exist until 1923, Crestmont’s researchers were able to locate its eventual components in other indexes at the time to back-test their total returns data to 1900. This gave researchers 105 separate periods of rolling 20-year total returns data (1919-2023) to analyze.

I won’t leave you in suspense concerning the results: 105 out of 105 rolling 20-year periods produced a positive total return, with more than 50 of these periods generating an annualized total return of between 9% and 17.1%. On paper, this has been a foolproof moneymaking strategy since 1900.

You’ll note that I’ve said “on paper,” and there’s a good reason for that. Investors can’t put their money to work in an index like the S&P 500 in the same way they can when they purchase a stake in a publicly traded company.

Mirroring the performance of indexes has only been possible since 1993, which is when the first exchange-traded fund (ETF), the SPDR S&P 500 ETF Trust (NYSEMKT: SPY), was launched. This index fund was created to closely mirror the performance of the S&P 500, and it gave investors an easy way to bet on the success of the U.S. economy and Wall Street.

What Crestmont’s data set has shown is that buying an S&P 500 tracking fund and holding that position for 20 years has been a guaranteed moneymaking strategy for more than a century.

Smiling person reading financial newspaper in a kitchen.

Image source: Getty Images.

Here’s the smartest way to take advantage of this historically guaranteed moneymaking strategy

Long-term investors have a number of index funds to choose from that can track the S&P 500. The aforementioned SPDR S&P 500 ETF Trust has done a phenomenal job of making patient investors richer, with a total return, including dividends, approaching 1,900% since 1993.

But what if I told you there was an even smarter ETF to own that could deliver effectively identical returns while mirroring the steady long-term uptrend of the benchmark S&P 500?

Say hello to the Vanguard S&P 500 ETF (NYSEMKT: VOO).

The Vanguard S&P 500 ETF and SPDR S&P 500 ETF Trust are identical financial instruments in that they both own baskets of securities designed to mirror the performance of the S&P 500, less management fees. It’s these fees — more specifically the net expense ratio — that serve as the key difference between these popular index funds.

Whereas the SPDR S&P 500 ETF Trust has a relatively low net expense ratio of 0.09%, the Vanguard S&P 500 ETF sports a truly microscopic 0.03% net expense ratio. This may not sound like much, but for investors who’ve put a lot of money to work in an S&P 500 tracking fund, or who plan to let their investment build for 20 or more years, a 6-basis-point difference ($0.60 in fees for every $1,000 invested) can really add up and allow you to hang on to more of your gains.

Everything comes down to perspective and time. If you’re willing to look to the horizon, an S&P 500 tracking ETF like the Vanguard S&P 500 ETF can offer what’s been a historically surefire way to grow your wealth.

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.

On Paper, This Investment Strategy Has Been a Foolproof Moneymaker for Over a Century was originally published by The Motley Fool