If a Stock Market Crash Is Coming, History Says This ETF Could Be the Smartest Buy for Investors
Is another stock market crash coming? Probably. Eventually. Maybe?
The correct answer is that nobody knows. As tempting as it might be to try to predict the next crash and sell all of your stocks before it happens, the odds of being successful in doing that are very low. Sure, you may pull it off. But there’s a higher likelihood that you’ll miss out on further stock price gains while you wait.
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There have been 27 bear markets in the S&P 500 (SNPINDEX: ^GSPC), defined as a loss of 20% or more, since 1928. So it’s safe to say that No. 28 will be on the way at some point. But instead of moving to cash, the better option might be to buy an ETF full of high-quality companies and continue adding even if the market pulls back.
For me, the Vanguard Dividend Appreciation ETF (NYSEMKT: VIG) is a good choice.
Trying to avoid market crashes usually backfires
Bear markets can be painful. No one is questioning that. But how you handle a bear market determines whether it becomes an opportunity or devolves into something even worse.
Since the Great Depression, the average bear market decline has been around 35% and lasted just over nine months. The average bull market, on the other hand, has gained 112% and lasted roughly 2.7 years. Given how often stocks rise rather than fall, the math certainly favors being invested in both up and down markets.
But because which days will go up and which will go down is completely unknown, there’s little point to trying to time it.
What usually happens is that investors sell their stocks only after much of the decline has already occurred, thus locking in losses. But then they wait for conditions to improve before getting back in. The problem is that stock prices have usually already begun to recover in that scenario. Investors get back in too late, thus missing out on gains.
This kind of behavior is why investors’ returns often lag the returns of the funds they invest in.
VIG is built around the companies you want to buy in challenging markets
During tough markets, you want to focus on quality. These are the businesses better positioned to withstand downturns because they have durable demand, operational advantages, strong balance sheets, or other competitive edges.
The Vanguard Dividend Appreciation ETF‘s strategy is simple. It invests in large-cap stocks with 10-plus years of consecutive annual dividend growth. There’s no specific provision for fundamental screening of these companies. But the 10-year dividend growth requirement effectively serves as one, ensuring they have the means to pay and grow their dividends over time.
That’s the better strategy. Instead of shifting to cash, shift to quality. You can buy stocks likely to experience smaller drawdowns while setting yourself up to buy shares at discounted prices. Continuing to buy during bear markets requires discipline, but it can also improve long-term returns.
The next crash doesn’t have to be something investors actively look to avoid. It can be an opportunity to position themselves more favorably in the long term.
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David Dierking has positions in Vanguard Dividend Appreciation ETF. The Motley Fool has positions in and recommends Vanguard Dividend Appreciation ETF. The Motley Fool has a disclosure policy.
If a Stock Market Crash Is Coming, History Says This ETF Could Be the Smartest Buy for Investors was originally published by The Motley Fool