On March 24, 2000, the S&P 500 (SNPINDEX: ^GSPC) closed at $1,527.46, the highest it had ever been. If you had picked that one day to put $10,000 into the U.S. stock market, you would have bought at the exact top of one of the biggest bubbles in modern history.
So how badly would this investment have wrecked you? Less terribly than you would think.
Missed Nvidia in 2009? This Rare Signal Is Flashing Again. In 2009, a “Double Down” signal flashed for a little-known chipmaker called Nvidia. For the first time in years, that same “Total Conviction” signal is flashing for a company 1/100th the size of Nvidia. Continue »
What you would be buying
Of course, you can’t actually buy the S&P 500 directly — it’s an index. You can, however, buy a mutual fund or an exchange-traded fund (ETF) that tracks it, like the SPDR S&P 500 ETF Trust (NYSEMKT: SPY). Let’s assume you invested $10,000 into SPY.
The dot-com bubble hit investors hard
Through the mid to late 1990s, investors decided the internet was going to change everything — and they were right. Where they went wrong, however, was paying almost any price to get in.
Companies with no profits and, sometimes, hardly any sales at all went public at enormous valuations. Pets.com, the poster child of the dot-com bust, went public in February 2000 and was liquidated nine months later.
From that March peak, the S&P 500 dropped 49% over the next two-and-a-half years, bottoming at $776.76 in October 2002. It took until 2007 to climb back to even, and then, not a year later, the great financial crisis hit, cutting the index roughly in half once again.
What $10,000 looks like today
But if you had the patience and fortitude to wait it all out, your investment paid off. Today, that same $10,000 is worth roughly $53,120, a gain of more than 430%. You can see the return in the chart below.
Patience pays off
Buying the top of a bubble is the worst case, and if you did, you had to wait about 13 years to finally get ahead. That is certainly brutal, but I think this is actually a really encouraging lesson. If you give the market enough time, you will make money.
That is, of course, if you let the market do the work. One bad decision — investing at the very top — can be corrected with time, but if you compound it by trying to time the market, you can easily make things much worse.
So, if you’re nervous about the state of today’s stock market (like I am), remember: Time in the market beats timing the market. The winning formula over the long haul is owning a diverse set of good businesses for many years.
