2022 has been horrific for investors, and most of the bullish sentiment has been sucked out of the markets. Even the most impervious of companies, such as Apple (AAPL), which generated $101.94 billion of net income in the TTM haven't been spared. The closed -2.87% on the week bringing its YTD decline of -18.66% even closer to the dreaded -20% bear market classification. The Nasdaq has been more volatile as it declined -by 28.28% YTD. Nobody wants to be the first to call a bottom, but we hear from many that it's close. The bottom line is that nobody knows or can accurately predict an exact bottom. There will be some that get close but predicting the future in calling the bottom is close to an impossibility.
So far investors have endured numerous external factors which have impacted the markets, including the war in Ukraine, increasing commodity prices (oil, gas, orange juice, coffee, lumber, wheat, corn, etc.), inflation, and rising rates. While many analysts cite that the S&P 500 will rebound in the back half of 2022, some of the largest U.S companies have announced layoffs. Netflix (NFLX) is laying off 150 employees while Ford (F) is cutting 580 U.S. salaried and contract employees. The recent earnings reports from Walmart (WMT) and Target (TGT) indicate that the economic environment has completely changed as they have been unable to pass along all the rising costs. Analysts seem to be divided on the idea of the U.S. heading into a recession. Consumer spending in the United States increased to 13911.55 billion in Q1 of 2022 compared to 13818.36 billion in Q4 2021 and is up from Q1 2021's 13282.68 billion. A recession won't occur until a widespread drop in spending creates a contraction in economic activity. Heightened levels of inflation and $100 not buying as many groceries is not a recession. One of the main reasons nobody wants to call a bottom is that we're starting to see small layoffs. If layoffs become widespread and unemployment starts to rise, a falling consumer spending number could spark a recession and create more pain for the markets.
While those paragraphs outlined how bad the investing landscape has been and many of the factors that could create another leg down, there may not be a better time to start buying. I will never understand why people are so afraid to miss out on the way up and are willing to buy when things are going well but are timid when the markets decline. Long-term investors should relish the opportunities being created and create a plan to put capital to work. The Vanguard S&P 500 ETF (NYSEARCA:VOO) has declined by $83.24 (-18.86%) from $441.26 to $358.02. If you're going to need access to the capital in the short term, then stay in cash. If you have years or decades ahead of you, history has proven that the S&P will rebound over time. I am horrible at timing the markets, and I don't try to. I couldn't tell you if the bottom is in or if the markets will bottom 3 weeks from now. It may take a week, several months, or over a year, but eventually, the markets will rebound, and I would rather be adding on the way down to index funds such as VOO than sitting in cash trying to play an improbable timing game. There isn't going to be an all-clear signal to get back in, and most likely, we won't know the bottom is in until way after it occurred.
History Is On Your Side And Has Proven That In The Long-Term The S&P 500 Has Gone Up And To The Right
Since 1927 there have been 14 recessions in the U.S economy, represented by the grey bars in the graph below. Some recessions lasted longer than others, and even the longest recession from 1929 to 1933 ended, and the S&P started to rebound. Nobody likes to lose money or see their brokerage accounts in the red, but every investor has experienced corrections or bear markets. These are part of investing.
I want to focus on the previous 2 decades because just about every person reading this article wasn't investing in the crash of '29. The recession of '07 lasted from November of '07 to roughly May of '09. During this period, the S&P topped out around $2,144.34 in October, just before the recession started, and dropped to roughly 1,001.19 in February of '09. This was a -53.31% decline in the S&P from peak to troth as the index fell 1,143.15 points. This was a prolonged period of pain, and those highs weren't passed until October of 2013. The decline created a fantastic buying opportunity for individuals in a position to do so.
Every two weeks, 100% of my 401k allocation goes directly into an S&P index fund. I have decades of work ahead of me, and I choose not to allocate capital to a target date fund because history has proven that investing in the S&P 500 over a long period will provide additional appreciation. Outside of my 401k, VOO is one of the index funds to which I allocate capital. When it comes to indexing, I believe in continuously buying. Too many people have driven themselves crazy trying to time the markets, and some have missed out on tremendous appreciation because they couldn't pull the trigger getting back into the markets.
VOO has declined by -18.86% and now is looking like a great opportunity. We're also heading into the next dividend as VOO has historically had a mid-late June Ex and Record date while paying its Q2 dividend around July 2nd. This is another reason I don't sit in cash with my long-term index fund investments, as I want to have as many shares as possible going into the dividends to maximize the number of additional shares I am receiving. I don't know how much further VOO will decline, but after declining by $83.24, it's looking attractive, and I am certain that new highs will be made at some point in the future. All of the shares I can acquire during declining periods will just bring me closer to my long-term goals.
Why VOO Is One Of My Favorite Index Funds And Part Of My Long-Term Investment Strategy
Vanguard is one of the most well-known and trusted fund families responsible for pioneering low-cost mutual fund investing. Vanguard offers various mutual funds and ETFs while providing access to C.D.s & bonds and money market accounts. 70% of Vanguard's funds have outperformed their peer averages as their track record is one of the best in the business.
One of the biggest reasons I love Vanguard funds is because I am extremely cheap when it comes to Mutual Funds and ETFs. I believe that my money is more beneficial in my pocket than in someone else's. Every mutual fund and ETF charges a management fee but not all management teams are created equal. Vanguard is one of the most well-known and trusted fund families responsible for pioneering low-cost mutual fund investing.
Vanguard charges a 0.03% expense ratio to investors for VOO. You are paying next to nothing for exposure to what many believe to be the greatest investible index from a solid management company and team. 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 0.80%. I would rather keep as much of my capital invested in the market rather than see fees add up to a sizable amount over time.
I have had a financial advisor discussion with several people, and I don't understand why so many people are eager to pay 1-2% in management fees. Don't get me wrong, I fully support having a financial advisor if they buy individual stocks, beat the market, and create a spread between returns and fees that outperform an index fund. I don't care if they charge 5-10%; if they can beat the market by a large enough return to charge a large management fee and still deliver a few points more in capital appreciation than an index fund, their worth their weight in gold. The portion I will never understand is allowing a financial adviser to invest in an ETF such as VOO and then pay them their 1-2% fee to sit there and have Vanguard manage the fund. You are paying Vanguard 0.03%, then a financial advisor another 1-2% to do nothing. After I had this conversation with one of my buddies, he looked into his account and realized that he had paid tens of thousands in annual fees over the years, and his financial advisor had him in a mix of the index and total market funds. This goes back to being cheap, and I believe my money is better in my account. VOO is an excellent low-cost index fund, and 0.03% is a rock bottom expense ratio.
The next reason why I love VOO is because of its well-balanced approach. VOO provides access to 11 sectors of the economy. With each share of VOO purchased, you gain exposure to Communication Services, Consumer Discretionary, Consumer Staples, Energy, Financials, Health Care, Industrials, Information Technology, Materials, Real Estate, and Utilities. VOO has an indexing investment approach designed to track the performance of the Standard & Poor's 500 Index. The S&P 500 was created in 1957 and was the first U.S market-cap-weighted stock market index. To be included in the S&P 500 index, companies must be based in the U.S, have an unadjusted market cap of $13.1 billion or greater, and a float-adjusted market cap that is at least 50% of the unadjusted minimum market cap threshold. In short, this index tracks the largest companies in America.
If the current market trends continue, and I am not saying they will, this would mark the 4th year in 2 decades where the S&P finished in the red. Look at what occurred the previous 3 times the S&P had a red year; at least the next two years were profitable. After 2008's horrific year, the S&P had 6 consecutive positive years followed by 2 positive years after 2015's decline, and the S&P has booked at least 3 positive years after 2018. Maybe 2022 ends in the red and breaks the streak of 3 previous positive years; only time will tell. What history has shown us is that the markets always bounce back.
VOO tracks the S&P almost identically. The average annual returns over the previous 10 years have been 14.6%, and since VOO's inception, it has returned an average annual return of 15.33%. Over the previous decade, we have had 2 negative years on the S&P, and 2022 is currently in the red. If you had invested $10,000 in VOO 10 years ago, it would currently be worth around $35,000. Vanguard has been an excellent Shepard of capital and has created long-term gains for countless clients.
The third main reason why I love VOO is its stability. VOO has a 5-star rating from Morningstar and had $760.1 billion in total net assets as of 4/30/22. The capital that I allocate to index funds such as VOO is for my retirement, so I want to take minimal chances. I can sleep well at night knowing that Vanguard's reputation is beyond reproach and that the chances of VOO disappearing are improbable. I like that VOO has a 27.4% allocation toward technology and that AAPL, Microsoft (MSFT), Alphabet (GOOG) (GOOGL), and Amazon (AMZN) are its top holdings. As an S&P 500 index fund, VOO provides exposure to the 500 largest U.S companies, so I don't have to do continuous research trying to pick winners. Eventually, the winners will end up in the fund, and I will benefit from America's next largest companies.
Conclusion
VOO is one of my favorite funds in general, as it provides a low-cost (0.03% expense ratio) vehicle to access the S&P 500. History has shown us that bad times don't last forever, and eventually, the markets will turn. I believe now is a great time to add capital to VOO if you're a long-term investor, as you are getting shares at an 18.86% discount from its previous highs. VOO's ex-dividend date is next month, and adding additional shares will only increase the amount of income generated for reinvestment. The S&P has been an excellent vehicle to build wealth and save for retirement. Vanguard is one of the best financial institutions, and VOO is a phenomenal index fund. I look forward to allocating capital every two weeks to the S&P, especially in this environment when I can get shares cheaper than the previous period or even the previous year.
Here is some food for thought. Since its inception, VOO has returned an average of 15.33%. If you were to use a conservative rate of 8% for the annual return, start with $100 and invest $100 every 2 weeks over 30 years, the entire investment would be worth $325,534. Your total contributions would be $78,000, and the overall interest or capital appreciation on your capital would be $247,434. At a 15% rate of return, the same investment structure would grow to $1.53 million dollars. It's hard to argue with the math, and if you are able to continuously invest in VOO, chances are your future self will be very thankful. You can play around with the numbers here.
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