Got $5,000? Here Is Why VOO's Iran War Recovery Makes the Case for Long-Term Index Investing Stronger Than Ever

The sudden swings in U.S. stock prices over the past two months may be making you a little dizzy.

After last touching an all-time high in early February, the Vanguard S&P 500 ETF (NYSEMKT: VOO) went on to fall roughly 9% over the next two months, its biggest drawdown in about a year. Since then, the exchange-traded fund, which tracks the broad-market S&P 500 index, has climbed all the way back and begun to set new all-time highs again in just three weeks.

This period, though, hasn't just been a roller coaster ride for investors. It has also featured events that meaningfully changed the trajectory of the U.S. economy. And not for the better.

• In February, the annualized inflation rate in the U.S. was 2.4%. For April, the Cleveland Fed is forecasting that inflation will jump to 3.6%.
• Brent crude oil prices were around $72 per barrel at the end of February. They've spent most of March and April around $100.
• In April, the University of Michigan's Consumer Sentiment Index dropped to 47.6, the lowest it has ever been in its roughly 80-year history.

But as an investor, your experience over the past couple of months was likely determined in large part by what type of investor you are.

If you grew more uneasy each time the S&P 500 (SNPINDEX: ^GSPC) dropped and finally decided to sell to avoid more losses, you probably had your money on the sidelines when the sharp and sudden rebound arrived, and missed out on it. If you maintained a long-term focus, however, you probably stayed invested and captured those gains.

With all of these ups and downs, 2026 has provided an excellent case study on the value of a long-term-focused investing strategy.

Image source: Getty Images.

Key takeaways

• During geopolitically driven stock market drawdowns, the declines have historically been somewhere between 5% and 15%.
• In most recoveries from such declines, the market took less than two months to regain its prior level.
• The Vanguard S&P 500 ETF saw a net outflow of $11 billion in March. That was only its second month in the past three years when it had a net outflow.
• This demonstrates that a lot of long-term investors pulled their money out at the wrong time.
• Even with the various recessions, bear markets, and generational events that have taken place over the decades, the S&P 500 has still produced average annual returns of 9% to 10% over time, and it now is at an all-time high.

The market tends to recover quickly after geopolitical shocks

History teaches us a couple of things about how the markets typically react during geopolitical conflicts.

• The S&P 500 typically experiences a decline of between 5% and 15% when trouble heats up.
• In the majority of cases, those losses are completely retraced within about two months of the index hitting its cyclical bottom.

This year's slide of 9% falls squarely in the middle of that range. Its recovery time of less than three weeks was even faster than is typical.

The bottom line: Stock market downturns resulting from geopolitical events can be fairly steep. But the usual recovery period from their nadir is short enough that if you try to time the market, you'll likely miss much or all of it.

The Vanguard S&P 500 ETF's performance during geopolitical events

Source: LPL Research

Historically, geopolitical events' impacts on the market have usually been short-lived. Given these downturns' uncertain timelines and the market's demonstrated ability to rebound quickly, there's almost no sense in trying to market time. Of all the arguments that could be made in favor of a long-term buy-and-hold investing approach, this may be one of the strongest ones.

So, if you've got $5,000 ready to put to work, the S&P 500 remains one of the best long-term wealth creation tools around. When short-term volatility rears its head, it's almost always better to sit tight, do nothing, and let the power of compounding do the work for you.

David Dierking has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.