SPY All time Highs -What's a Long-Term Investor to Do? NO AI WAS USED IN THIS POST!

On its 1/19/2024 $482.43 close, the SPY has finally closed at a new ALL TIME HIGH. It has taken 746 trading days or 2 years and half a month for the market to get back to square 1!

SPY = SPDR S&P 500 Exchange Traded Fund

Source: Yahoo finance

Looking at the above SPY chart since inception, note that for much of its life SPY was AT or NEAR its all time highs! Almost 40% (3038/7800) of all trading days were NOT in major drawdowns. All time highs are not that special for SPY (or DIA or QQQ, for that matter!). What is of most interest to buy and hold investors, is not the highs but the lows -- the frequency, timing and duration of drawdowns. 

Source: Yahoo finance

For instance, the SPY was down almost 60% in March 2009! It fell almost 50% in 2002 and touched minus 25% in its most recent 2022 drawdown! Below is the list of seven major SPY drawdowns since inception:

Source: Yahoo finance

With the market reaching all time highs in the last week, WHAT'S AN INVESTOR TO DO?

One option is to do nothing! A very Bogle-like answer. Admittedly 7 years may be a long time to wait for recovery but thankfully, a 7 year wait has only happened twice in SPY's 30-year history. The S&P 500 index had only two longer waits in it's 97 year history!

Source: Yahoo finance

The 25 year drawdown of the Great Depression was a little much. And the Go Go Nifty Fifty collapse was right in line with SPY's drawdowns. The solace here, if there is any, is that nobody did any better than the indexes anyway. Still true today.

As for another plan of action, what about insurance?

The most basic kind of insurance is what option* traders call the "Married Put". This is when the stock and its at-the-money put are held in the same account.  Puts give you the right to sell your stock any time before expiration at the strike price. So, if the stock falls below the strike, you can always sell it at the higher strike. 

Let's look at the cost and returns of holding SPY WITHOUT versus WITH insurance. 

Source: Schwab thinkorswim

The above table is a record of being long the SPY and buying the one year put on the last trading day of the year. SPY puts began trading in 2005, so, this is a complete record. 

For example, on the last day of 2005, SPY closed at $123.51 and the nearest 12/15/2006 $125 put closed at $5.70. The premium cost 5% of SPY's price! So after a year, SPY closes 2006 at $141.62 for a gain of 13% and the put expires worthless! If you bought the insurance, your net gain would only be 8% (13% SPY - 5% Put). 2006 was not a good year for insurance. 

As you look down the table you will see that most years, the put would expire worthless and just drag down the SPY return. Of course, 2022 was different. One way to look at this is to compare stock insurance to any other insurance. The one year married put premiums averaged 8% since inception. Is it worth 8% of your house value to insure your house for a year? Or your car? Your car, maybe yes. Insurance on  a $10000 car may cost $800. 

In sum, insurance would cut the SPY annual returns by half to roughly the rate on Treasury bonds.  If you really think we are on the heels of a great depression, with two world wars in twenty years, maybe so. In today's world, maybe not so. 

Why SPY? Is SPY the market? No and yes. SPY, which tracks the S&P 500 index-roughtly 80% of the market, is the world's largest, most liquid, least expensive and lowest tracking error exchange traded fund. 

*Options are a complex subject with ton's of online resources that may or may not be worth study. Why not? There's too much misinformation in many option claims and, historically, option mutual funds (arguably the richest and smartest option traders), sadly, underperform the S&P.