33-Year History Shows How to Profit Even When a Market Crash Hits

In 1993, the SPDR S&P 500 ETF (SPY), the world's first exchange-traded fund, was launched. Over the subsequent 33 years, this fund has provided valuable insights into profiting from market crashes. To comprehend this, one must recognize that the SPDR S&P 500 ETF mirrors the performance of the S&P 500 index (^GSPC -0.02%), a collection of around 500 stocks representing the U.S. economy.

Market-cap weighting determines the influence of each company on the index, reflecting the economic structure. The ETF's history mirrors that of the market, with multiple bear markets such as the dot-com bubble burst, the Great Recession, and the pandemic-induced downturn. Despite the intensity of these crashes, SPDR S&P 500 ETF rebounded each time and continued to achieve new highs.

This trend, characterized by alternating bull and bear markets, has been consistent over the long term, with the index's performance being less pronounced in the 33-year timeframe due to the absence of an ETF tracking it before 1993. The key takeaway from this 33-year period is the importance of long-term investing. Buying and holding, even during major market downturns like the Great Recession or the dot-com bubble, led to substantial capital appreciation.

A strategy known as dollar-cost averaging, which involves purchasing more shares during low prices and fewer when prices are high, would have further improved returns by lowering the average purchase price. Panic selling during market downturns is discouraged, as history demonstrates that every bear market is eventually succeeded by a bull market.

The lessons from the past three decades emphasize that bear markets are an inherent part of investing, and adhering to a long-term investment plan, such as holding SPDR S&P 500 ETF, can help investors weather such storms. This approach, backed by The Motley Fool's premium services, encourages investing better and managing emotions effectively.