Investing At Market Tops – SPDR S&P 500 Trust ETF (NYSEARCA:SPY)

We are less than a fortnight from the ten-year anniversary of the S&P 500 (SPY) peak on October 9th, 2007. Readers are going to be inundated with market commentary comparing the previous peak to today’s near all-time high levels. In this article, I am going to beat those market pundits to the punch. I also hope that this article on the performance of U.S. stocks over that ten-year period has some important takeaways for long-term investors.

The S&P 500 closed at 1565 on that fateful fall day in 2007, and would not close above that level for another 45 months. From that October peak to the trough in March 2009, investors saw a 50% drop in the market value of their money. Today? Investors who bought at the market high on that fateful autumn Tuesday have roughly doubled their money over the past decade.

The chart below shows the cumulative return of the S&P 500, including reinvested dividends, from that previous market peak through yesterday’s close.

Investors who put their money in at the market top have earned 7.1% annualized returns. This is not an article about the “Rule of 72”, or how dividing 72 by a return gives you the number of years for an investment to double. This is an article simply on the power of long-term investing and compounding interest.

There are plenty of market participants who are simply staying out of the market because of elevated market multiples and a historic streak of recent market gains. Sure, if you sold in October 2007 and bought back in at the absolute lows in March 2009, you did not just double your money, you quadrupled your money. That is really tough to do, which is why many active investors have underperformed the market. Many more people failed to get back into the market, and have not reaped the gains of a historic market run.

Even if you went back to the height of the tech bubble when the market reached a then all-time high on March 24, 2000, investors have earned roughly 4.9% annual returns to today. Admittedly, that is not a great total return, and would have underperformed safer investments like long duration U.S. Treasuries over that period, but I view that return as still adequate. From a market peak, and through two historic equity market drawdowns, investors have been paid to own U.S. stocks.

How do you boost your returns over that period? It is not necessarily timing the market through timely exits and re-entries. It is finding the ability to invest even more money when stocks have sold off. Doubling…

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