VOO: For 48% Of This Century, The S&P 500 Made 0%. Here Are The Facts. (NYSEARCA:VOO)

NickS/E+ via Getty Images I don’t know where the S&P 500 and the Vanguard S&P 500 Index ETF (NYSEARCA:VOO) will go next. And neither does anyone else. But I do know this because I researched it, and it is fact: We are 24 1/2 years into the 21st century, and the S&P 500 spent about 45% that time going all over the place, but ending up exactly nowhere. From January 2000 through June of 2024 is 294 months. Including dividends, here is the performance for a Vanguard mutual fund twin of VOO (which ironically debuted just a couple of months prior to the end of this period, charted below). Seeking Alpha Above we see that from the start of the year 2000 through November 29, 2011, the S&P 500, including dividends, earned a total of…0.02%. Nothing. Over nearly 12 full years. That’s 143 months out of 294 this century, 48.6% of the entire first quarter century. Of course, this mutual fund, VOO, SPY, IVV and the S&P 500 index itself are all essentially the same thing, with only minor differences from expense ratios between them. Here they are since VOO started. Seeking Alpha Then, the cycle changed, dramatically. And as usual, it was, as the expression goes, slowly then all at once. Seeking Alpha From that point forward, November 29, 2011 through last Friday, June 21, 2024, VOO rose 478%. Fantastic, wonderful, fabulous, and very nice. VOO can make you go blind…to the full scope of investment reward and risk But looking at that last snapshot of history, or the one above it without considering the other, is like covering one eye when you drive. You might be OK, but you may also blind yourself to something you really should have seen. As I’ve discussed quite a bit recently with Seeking Alpha readers in the comments section of my past articles, my concept of what investing is to me is very different from a lot of the opinions I see. Specifically, I think way too much emphasis is put on recent past performance that excludes full market cycles. And oh boy, is the equity market cyclical over longer periods of time! That’s why I decided to try to fill in some gaps for those with rose-colored glasses about VOO and the S&P 500 index. Frankly, before that causes potentially lifestyle-changing damage to some investment portfolios. I used to protect and grow other people’s hard-earned assets for a living. It was my career from 1993-2020, when I sold my boutique investment advisory practice (during which I managed 3 different mutual funds at different points in time) and in semi-retirement, have focused on 2 things: 1. Further developing and refining my own research and portfolio management process to position myself and anyone else who finds me for modern market dynamics. 2. Trying to shed some needed light on what I find is an astonishing lack of focus on the risk-management side of the investing equation. Or as I put it: Any investment can go up in price at any time. The key is to gauge the level of risk attached to pursuing that return. Investors today love to use the words “right” and “wrong” and “bull” and “bear.” Those are 4 words I try to use sparingly. Because when any investor sees this as a way to prove their method is better than someone else’s, I think all they really do is to show their ignorance about what is a very complex subject. Every investor is different, has different objectives and their own belief system about seeking investment reward and managing investment risk. So this article is NOT about telling anyone what THEY should do. It is simply sharing one of the most critical aspects of investing that is easily forgotten or ignored at times like this. Because these are some strange and unique times for the US stock market and the S&P 500 in particular. Only 3 times in my career have I seen the type of overconfident investor climate that I see now: 2007-2008, 2000-2003, and 1987 (when I was still a Wall Street rookie, years from getting my first chance to make investment decisions for clients). Does that mean that the rest of 2024 and/or 2025 will turn out as poorly and worsen as many financial lives as those 3 other periods did? No. But does it remind us that when it comes down to it, investment management really is a constant effort to manage risk (since anything can go up at any time)? I think so. Now, let’s look at the current condition of VOO and the S&P 500. Not “where’s it going next” but “what is the range of possible outcomes. From there, it is everyone for themselves! S&P 500: It wears a big CAPE, but is it still a superhero? Some investors think that Yale professor Robert Shiller’s Cyclically Adjusted Price Earnings (CAPE) Ratio, which smooths out earnings over 10 years and factors in inflation, is a false indicator. Others swear by it. My take is somewhere in between. I think it is a great perspective indicator, like so many others I have chosen to track on my own short list of macro data. What CAPE says now is that the S&P 500 is extremely overvalued, in a way that we only saw prior to 1929, 2000, early 2018 and near the end of 2021. So, it has a good record of warning that risk is high. But risk can be high for a long time before it is realized, and the S&P 500 falls hard. So this is not a precise timing indicator. But no single macro or valuation indicator can be reliable on its own. It takes a set of such proverbial “wise men” to agree before things tend to follow through to the downside. There are many, many indicators I follow that flash high-risk warnings, but that’s beyond the scope of a single article, so I’ll blend them in to future writings as much as I can. For CAPE now, suffice it to say that to me, that high CAPE Ratio is simply a reason for me to make sure I have adequate “tail event risk” in my portfolio.” And I do, via out of the money put options on major indexes, and some single and also leveraged inverse ETFs (which I manage tactically, so as not to fall into the trap of holding them too long when the market doesn’t cooperate). Data by YCharts But perhaps my biggest risk-management device for the past 2 years has been a heavy allocation to T-bills and ETFs that own T-bills. Again, something I plan to expand on separate from this VOO-focused article. VOO: investors should concentrate on how concentrated it is At $1.1 trillion in assets, VOO has been a huge success…for Vanguard. As for investors, I showed above how well the S&P 500 and any product tracking it has done for the majority of the past 12 years. But it is no secret that VOO is now dominated by Technology stocks in a way that we have not seen since…you guessed it…the year 2000. That is, right at the start of that 48% of this century (so far) that investors spent making up for their losses, rather than consistently generating gains. Seeking Alpha The fact that 3 stocks make up 20% of VOO and another 3 make up 10% more has historically been an issue for markets. But this is 2024, when central banks and governments around the globe continue to test an experiment in creative financing. When will be massive debt and deficits create market hysteria, as they have in the past? I have no idea. But that doesn’t matter. What matters is that I have chosen to not only think about risk management, but make it THE priority in my semi-retired life. I say that simply so that others in my age range (I’m at the tail end of the Baby Boomer generation, so let’s say 60-75 years old, and those within 5 years either side of that) can be reminded that investing today is not limited to buying “the market” and hoping it does what it did for 52% of this century, where a few sharp drops were recovered quickly enough to prevent panic from ensuing in the retired and pre-retired set. Investing today is being fully cognizant of what is possible. So that making decisions for oneself can be done with full information, and eyes wide open. When we look at VOO’s top 25 holdings, of course there are the giants at the top. But the rest is a bit mixed. There are stocks with low P/E ratios and low Price to Sales (PS) Ratios, and some with sky-high valuations. But so much attention and weighting in VOO is skewed toward some great companies with questionable valuations, it tends to crowd out what I think should be a greater focus on stock selection “under the hood” in sectors, industries and stocks that offer (to me) a much better reward-risk tradeoff. YCharts I like the Magnificent 7 and tech titans, but I prefer to deploy them very tactically in this environment. Buy and hold does not sync with my investment approach when stocks are up hundreds of percentage points over the past year or two. That is why historically, I have missed out some of the biggest parts of the booms, but offset that by not losing much or making money in the worst markets. Here, I see that the Price to Sales Ratio for VOO is 2.9x. That’s just too high for me to think that anything more than a “blowoff top” situation is at hand here. And the dividend yield has only been as low as it is now on 2 other occasions since the 1970s. When was that? Summer of 2000 and the end of 2021. Oops! I’ll focus in on that dividend aspect in another article coming up soon. It is a microcosm of what I see as the risk to VOO and the S&P 500 continuing its recent run to new highs. YCharts I realize that a risk-management-first approach is not for everyone. And nothing I write is intended for any particular investor. It is simply offering insight into one person’s approach, following 30 years in the “hot seat” where other families’ financial lives were my responsibility, at least in terms of day-to-day decisions of what to buy and sell in public markets. Today’s market is exciting. But that’s a double-edged sword. Here’s a chart of 10-year rolling annualized returns using the mutual fund predecessor of VOO, to get the full 21st century history in front of us. I see a lot of time below 8% and plenty below 5%, which is what T-bills yield now. There is also the “recency effect” of the past 6 years in this chart, where 10-year annual returns were between 8% and 16% in every period. But this is one phase of a longer market cycle, albeit one that can blind investors to the other possibilities that exist. That causes some to put risk management to the side, which is THE big mistake I see frequently. Data by YCharts I observe that too many investors have short memories. That is a good thing in many aspects of life, but not in investing. Case in point: there was so much euphoria at the start of this year because the “market” had done so well during 2023. Yet, all that happened to VOO is that is recovered what it lost during 2022. If your team wins its last 7 games of an NFL football season and that allows them to finish with a record of 8-9 (8 wins, 9 losses) because they started off 1-9, it is a hollow victory. Data by YCharts Put another way, any time the market has to spend a year or two or more just clawing back the losses which occurred prior to that rally, and the numbers look like the chart above, I call that wasted time. And I am concerned that many investors were not active enough in the markets, and thus not aware, that S&P 500 investors “wasted” the first 12 years of this century. Human nature is to remember our wins more than our losses (especially when in a situation where everyone at the table is bragging about their winnings). But as I’ve said many times, I learn so much more from what doesn’t go well than what does in my investment activities. What I’m doing: managing risk, but trying to get my “fair share” of any future VOO/S&P 500 upside Most importantly, the 48% statistic that is the headline and main point of this article is a metaphor for awareness of risk management as part of the investment process. And given the precarious historical position we find VOO in here in mid-2024, and what we know is possible, I am allocating my portfolio in a way that aims to accomplish 3 things over the next 6-12 months: 1. Keep loss potential to within 5% of where the portfolio is now. I frankly do not care if the market goes up or down. My job for myself is to make money as often as possible, and avoid major drawdowns. That can’t happen if a portfolio is highly correlated to an ETF like VOO. Many commenters to my past articles have stated their preference for “hanging in there” and “not trying to beat the market.” Put options on major market indexes and taking advantage of 5% T-bills is a big part of the process. So is a more active process of taking gains when I have them, as despite the mirage that is the S&P 500, underneath there are a lot of stocks simply trading up and down. Not for just this year but for a few years now. But that gets masked by what VOO has done, thanks to a small number of runaway winners. Maybe that past performance repeats itself. But relying on that, instead of seeing it as one potential, albeit low probability outcome, is a huge risk. YCharts 2. Since a “melt up” in VOO and its peers is always one possibility from here, get creative in how I get my “fair share” if that happens. I created a hypothetical mix model portfolio, merely to demonstrate the concept. I do this type of thing in one of my own portfolios, but not in a buy and hold fashion. This allocates 90% to a T-bill ETF and the other 10% to a 3X leveraged S&P 500 ETF that has been around for many years. Again, this is just to provide a sense of what types of alternatives exist (using options, unleveraged ETFs, leveraged ETFs, stocks or a combination) when markets go in one direction, then the other, as we have seen since the Fed started raising rates in early 2022. YCharts (Sungarden Investment Publish/Rob Isbitts) I am not focused on where the mix (purple line) ended up, but rather the path it took to get there. Its maximum decline was 7% versus 24% for VOO. The bottom line: I am not “anti-VOO or anti-S&P 500” at this stage of the market cycle. I simply am research and deploying ways to use that highly liquid index and investment vehicles that track it in other than buy and hold form. During the first 12 years of this century, I researched, experimented with and created many ways to try to participate in the most vertical market moves, but not have to be constantly looking over my shoulder for when the party would end. 3. Use the stocks in VOO, particularly those below the 25 largest, to create a portfolio of stocks that can serve as a longer-term core. Because the S&P 500 is too vulnerable for me to simply assume the recent past is a prologue. The 25 largest stocks in VOO are nearly half of its total allocation. That leaves quite a selection of businesses that have not done as well, in large part due to the “indexation” of markets, where so much money piles into VOO and others like it (over $1 trillion as noted earlier) that the stocks with momentum keep going. If this market cycle is like every other in modern history, that will revert to the mean, so to speak. My conclusion on VOO and S&P 500 peers: this is an ideal time to use the flexibility of modern markets to play offense and defense at the same time I am not telling anyone else what to do. That’s not the goal of any Seeking Alpha article (it is opinion and research, not personalized advice). But knowing that the facts tell us that about half of the most recent 25-year period was a time when fund managers earned their fee every year, but investors in S&P 500 vehicles earned nothing, perhaps I’ve shed some light here. And if someone is half my age, there’s a good chance they will see investing as very different as I did when I was 30. But at 60, and post-sale of a business, that’s not my playbook at all.

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