Is the Vanguard S&P 500 ETF Still Worth Buying When Markets Are Down?

It probably goes without saying that the S&P 500 (^GSPC 0.41%) and the ETFs that track it are some of the best options for retail investors. Their broad diversification and ultra-low fees make them ideal for almost any long-term investing goals.

But people often dial back their risk tolerance when stocks start falling. It’s not unusual for people to sell their S&P 500 ETFs altogether if stock prices fall far enough. This is one of the most damaging things investors can do to their own portfolio performance.

While it’s tempting to exit in situations like this, let’s look at some actual history to see what happened during past bear markets and why it makes sense to keep buying ETFs, such as the Vanguard S&P 500 (VOO 0.39%), even when times get tough.

Key takeaways

• The S&P 500 has recovered from every bear market in its history, including declines exceeding 50%.
• People who remained fully invested in the S&P 500 from 2000 through 2020 earned a 4% average annual return despite two historic bear markets.
• Bull markets tend to last far longer than bear markets. This means there are far more opportunities to generate positive returns than losses.
• Selling during declines usually means missing out on subsequent recoveries. That means investors often see far lower returns than the index itself.

The case for buying the S&P 500 in a down market

It might be easiest to start with the argument for long-term dollar-cost averaging. It says that if you invest regularly, some purchases will be made at higher prices and some will be made at lower prices. Combine these transactions all together, and you’ll end up with a lower average purchase price over time.

But the more compelling argument for many investors might be a simple one. Historically, the S&P 500 has a 100% success rate at recovering from a bear market and setting new all-time highs.

That doesn’t mean the road will be painless. During some of the most destructive bear markets in history, it took stocks years to make a full recovery. At some point, that will likely happen again.

But history has shown that stock prices do eventually recover. It’s the concept of buy and hold that allows investors the opportunity to capture the rebound instead of getting out when prices are already down.

S&P 500 bear market recovery history

Data source: S&P Dow Jones Indices. Recovery is defined as returning to prior market highs from the bottom.

The point of this graphic isn’t to illustrate how long it took to get to a new all-time high. It should be read as this is how long stocks were climbing before reaching a new all-time high.

An investor who gets out of the market and waits for stocks to get closer to new highs before getting back in misses out on a huge part of the recovery. It’s staying invested throughout and continuing your process of automatic investing that allows you to achieve better long-term returns.

The Vanguard S&P 500 ETF remains one of the best vehicles for investing in the index. Investors should keep adding to it regardless of whether the market is going up or down.