20 Years of S&P 500 History Show: This Simple Strategy Is Only 8.3% Less Than "Perfect"

The stock market has been wobbling a bit in October. Although the S&P 500 index (SNPINDEX: ^GSPC) hit a new all-time high on Oct. 6, it had declined by about 2% as of this writing. Some investors worry that major tech companies are spending too heavily on the build-out of artificial intelligence (AI), and that future AI tools and products won't recoup those hundreds of billions of dollars of capital expenditures (capex). Rising bond yields have also recently sent warning signals about high inflation and government debt. Is now still a good time to invest in stocks?

During times of high uncertainty and volatility in the stock market, it's easy for investors to lose confidence. Sometimes people get tempted to try timing the market. They say to themselves, "I'm going to stop putting money into stocks -- for now. I'm going to wait until the stock market goes down by another 5% or 10%. Then I'll buy back into the market and watch my investments go up!"

Here's the problem with this kind of thinking: It's impossible. There's no such thing as "waiting for the right time" to invest. That's because no one knows the future. The stock market can go down and keep going down. Or it can bounce back from a downturn and skyrocket to new highs. All these market moves happen faster than you can decide that "now is the best time" to put money into the S&P 500 again.

Schwab research found something notable: Time in the market (just investing as soon as you can, as soon as you have cash available to deploy) is almost as good as perfectly timing the market (which is impossible). Let's look at why investing in the S&P 500 early and often is almost as good as the impossibly perfect standard of "choosing the right time" to invest.

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Schwab research: Perfect timing outperformed time in the market by only 8.3%

Schwab's research team analyzed historical S&P 500 returns over 20 years (from 2005 to 2024) to determine which investment strategy yielded the best returns.

They calculated how much an investor could have earned by investing $2,000 per year for 20 years with "perfect market timing" (buying $2,000 worth of S&P 500 shares on the day of each year when the S&P 500 reached its lowest closing level that year). They compared this result with an example investor who invested $2,000 per year for 20 years for maximum time in the market (buying $2,000 worth of S&P 500 shares on the first trading day of each year).

The example investor with "perfect timing" (investing $2,000 at annual S&P 500 lows for 20 years) had a balance of $186,077 after 20 years.

The example investor with the most time in the market (investing $2,000 on the first trading day of the year for 20 years) had a balance of $170,555 after 20 years. That's only 8.3% less than the investor with perfect timing.

It's no surprise that perfect market timing did better. But perfect market timing doesn't exist. Here's what might be the most important finding from this study: Just by investing the same amount of money in the S&P 500 every year, as early as possible, an investor could have earned returns that were only 8.3% less than perfection.

How to invest for the future with time in the market

How should you invest, now that you know this amazing fact? Here's the thing to keep in mind: The S&P 500 tends to go up in the long run. On any given day, it might go down by 1% or more. In any given year, it might enter a correction (a 10% decline or more) or a bear market (a 20% decline or more). Sometimes the S&P 500 goes sideways and stays mostly flat for years at a time. Sometimes it has a dreaded "lost decade" when investors see barely any growth.

But over the past 98 years, since 1928, the S&P 500 has delivered annualized returns of 9.98%. That's an impressive sign for long-term investors. Over the past 16 years, the Vanguard S&P 500 ETF (NYSEMKT: VOO) has delivered an annualized return of 14.94%. In the past five years, it's delivered annualized returns of about 13.8%, even after absorbing an 18.15% negative total return during the bear market of 2022.

If you're worried that now is the "wrong time" to buy stocks with S&P 500 ETFs or other low-cost index funds -- don't be. If you're in it for the long haul, if you can keep calm and hold onto your investments, there's almost never a bad time to buy a diversified portfolio of stocks.

The stock market -- in the long run, for patient, confident investors -- tends to be a winning proposition. Don't try to time the market. Just keep investing on a regular, consistent basis, and let the power of the stock market build a prosperous future for you.

Ben Gran 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.