Key Points
The Vanguard S&P 500 ETF has delivered 15% annualized returns since 2010, despite corrections and crashes along the way.
Buying international stocks could be a smart diversification move for investors worried about high S&P 500 valuations.
The stock market tends to recover from short-term corrections of 10% or more. Buy-and-hold investors who stay invested for the long term can capture the biggest gains.
The past few years have been good for the stock market, but good times don't last forever. America hasn't had a big bear market since 2022. Some investors worry that the stock market is flashing warning signs. The S&P 500 (SNPINDEX: ^GSPC) Shiller CAPE ratio is nearing levels it hasn't reached since the dot-com bubble.
But even if a stock market correction is overdue, that doesn't mean most people should make big corrections to how they invest. If you're truly a long-term investor who can leave your money alone to grow for five to 10 years or more, one simple strategy is likely the best bet.
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That strategy is: Keep buying and holding a diversified portfolio of stocks. If you're like me, you're probably investing in stocks on every payday, out of every paycheck. Keep doing that. Keep buying stocks with dollar-cost averaging -- putting the same amount of cash into the stock market each month.
Here's why this simple strategy is likely to pay off for long-term investors.
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Stocks don't always go up today or tomorrow -- but they tend to deliver returns in the long run
A stock market correction is generally defined as a 10% decline in stock market prices. A bear market is even bigger: a 20% decline. But in the long run, the stock market tends to go up. That's because the economy tends to grow, companies tend to get better at earning money, and more people and institutional investors put money into the market.
Here's a fun fact about the stock market: The S&P 500 has delivered average annual returns of 10% for the past 98 years. That doesn't mean you're guaranteed to get 10% returns every year. But in the long run, the 500 largest publicly traded companies in America tend to provide powerful wealth-building returns for investors who buy and hold those stocks through short-term ups and downs.
The Vanguard S&P 500 ETF (NYSEMKT: VOO) is one of the most popular low-cost index funds that lets you buy the entire S&P 500 index. It charges a rock-bottom expense ratio of 0.03%. For the past 16 years, since VOO was established in September 2010, it has delivered average annual returns of about 15%. That's even better than the S&P 500 index's long-term average return of 10% per year. The past decade and a half has been very kind to buy-and-hold investors.
Want more diversification? Buy international stocks
Just buying the U.S. stock market is often a good move. Owning the S&P 500 can offer broad diversification. But many investors are worried about the S&P 500. They question whether it's too expensive, too top-heavy with tech stocks, too dependent on the continued growth and success of the artificial intelligence (AI) boom.
Recent research from Vanguard suggests that international stocks might outperform U.S. stocks for the next 30 years. There are no guarantees that Vanguard's research is correct, but the Vanguard model is based on current-day valuations and the prospects for future earnings growth. If you feel like America's leading tech stocks are too expensive and that the S&P 500 is unlikely to keep outperforming the rest of the world, you might want to buy international stocks.
The Vanguard Total International Stock ETF (NASDAQ: VXUS) offers broad diversification away from the U.S. stock market. It holds 8,772 stocks from dozens of other countries. This fund has delivered annualized returns (by net asset value) of about 9.6% for the past 10 years, 9.2% for the past five years, and 26% in the past year.
Stay focused on long-term investing
The Vanguard S&P 500 ETF has delivered 15% annualized returns since September 2010. International stocks owned by the Vanguard Total International Stock ETF have delivered 9.6% annualized returns since September 2016.
Think of all the crises and stock market corrections (and one serious bear market in 2022) that have happened during those years. Even with short-term bad news and stock market volatility, long-term investors in these diversified low-cost index funds have still gained strong returns.
It's easy to say this when stocks are at all-time highs, and harder to keep doing so when stock prices are plummeting, but it's true: Buying stocks tends to be a good bet for the long run. Just keep buying a diversified mix of stocks. Hold on to them for years. Try to ignore short-term noise and negativity and let the stock market work for you.
Ben Gran has positions in Vanguard Total International Stock ETF. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.