It’s not just buy and hold S&P, market timing matters!

The unrelenting bull market that is now entering year number 4 has many people to the investing playground. This amazing track record has led to the booming interest of so called “buy and hold” investing strategies. The main idea is that you just put your savings in ETF tracking S&P and it will grow and deliver value for your retirement plans. It sounds extremely enticing just buy and forget and the market will do its thing and grow your capital.

However our team doesn’t believe in social media popular ideas! Therefore we sent out to confirm the numbers behind the “buy and hold” strategy. Because we can’t let people blindly follow any investment strategy.

What we did?

To check how this famous strategy is performing we start in January 1^st 1990 and then we test each month as a “buy-in” month for the strategy, all the way up to December 2025 (432 months to be exact). We test 4 different holding periods – 5, 10, 15 and 20 year. Essentially what we do is we see the value of S&P 500 on Jan 1^st 1990 is $359 which means if we have 1000 USD we can buy 2.78 shares of any ETF following the index, then 5 years later on Jan 1^st 1995 we see that the index has become $459, so can sell our 2.78 share for $1,278. This means 27.8% total return for the period. So by doing this for each of thos 432 months we can average the results and get an idea of how successful it is. Obviously the longer the holding period (10,15,20Y) the bigger the total return, so we can make “per 1 year” using smart math formula e.g. for the 5 year test with (1+R)^(1/5)-1 we get 5.02%. With this we can compare across the different holding periods.

High level results

So by doing this test when we average we get this very impressive result when looking at the total return:

This tells us that if we have invested $10,000 we can expect $15,820 after 5 years or $21,186 after 10 years or $27,800 after 15 years or $35,250 after 20 years. It is quite impressive result!

Immediately we see few insights that need to be shared:

-        Shorter holding periods tend to have higher “per year” return – this is because 5 and 10 year horizons match better with the market cycles, while longer ones like 20 year surely go over many ups and downs;

-        Longer horizons have much higher Sharpe ratios (return relative to risk) – again due to the same mechanic shorter holding periods can be either very very successful or pretty bad, while the longer ones smooth out the market up and down cycles.

Please note that we said that this average is also “expected” and this is very big word s it drives decisions!

So we need to ask can we expect these mean returns in any time? Or there might be some hidden dynamic that can help us understand it?

Another hot topic these days is the “bubble”. So in general stock markets are oscillating function with an upward trend – essentially over time they grow, but from time to time there are downs. Historically speaking the best way to predict these downs is with the valuation of the market. Most notably this is done by looking at the Price-to-earnings (P/E) ratio of the index. Essentially the higher the ratio the higher the value placed by investors. But if the markets get “too hot” this ratio becomes unreasonably high and we expect downward correction. Even now we can see concerns from Wall Street that S&P P/E ratio is too high and we might be in a bubble.

So lets see what this means for our “buy and hold” strategy test. We know historically in each of 432 months what was the P/E ratio of the index. So we can group those and see what is the average of each group. For example in 2025 the S&P P/E ratio was around 28-29x. According to our grouping this falls in the months with ratios between 25 and 30x. So lets see what was the average total return of all horizons if we started our “buy and hold” strategy only in months where P/E was between 25 and 30x:

It is astonishing result! To be honest this is not something mentioned very often in investment talks!

Turns out it does matter when you start your “buy and hold” strategy! If you happen to start in a period where market valuation is particularly high this can lead to leaving a lot of money on the table! So the total return of our 5Y holding period turns into a meager 17.4%. True, in longer horizons the market smooths itself but still even in the 20 year investments we leave a fifth of the potential return.

And investors can avoid this by simply looking at the P/E ratio and choosing to begin their strategy in a period where S&P is not so highly overvalued.

P/E is not enough, going deeper

Lets go a step further, P/E ratio as indicator has a inherent flow – it is a ratio (price divided by earnings). So if P/E is high it can be either because the price is too high or the earnings are too low. To take this into account we can classify each of the months based on the price level relative to the recent history (we take the 24 month moving average as a proxy). So if the price in a particular month is higher than the recent moving average we put it in this class where we know P/E is so big due to overvaluation, and not due to low earnings. So if we nest the two dimensions across the 4 strategies lets see how the annual return looks like:

So basically if we start our “buy and hold” investments in a period where P/E is above 25 and S&P price is above the 24 month moving average, we can expect only half of the potential return! And in shorter horizons like 5 and 10 years is not necessary to break even. While if P/E happens to be low and we catch S&P at lower level then we can expect more than a third over the usual return.

All this means that market timing matters even with long-term passive strategies like “buy and hold”. It is crucial where to start your investment, you can’t just blindly decide one day to start investing into S&P like many people are doing these days.

Why it is happening?

The reason for all this is that the market goes through cycles like this:

So by design “buy and hold” strategies that go with very long horizons should avoid the interim cycles (ups and downs), but it is important also where you start. Although in any case you can positively expect good results, if you do not time the cycle you will naively sacrifice part of the return. This is something no one talks about, and it turns out it is pretty big indeed as per our test above.

You can see these cycles when we take a look at S&P monthly levels (colored ones by P/E and then by the price level relative to the 24 month moving average):

So clearly we can see the cycles that the index goes through. Obviously if you have started your investment in 1999 or 2007 (both peaks) then it wouldn’t have gone the best possible way. Oppositely if you have waited 1 more year and bought in at much reasonable P/E levels then you would be very happy.

Current situation

So what does it mean right now for us in 2026? As of last month P/E ratio of S&P 500 is around 28x and the current index price is at 110-120% relative to the 24 month moving average. Historically speaking this is absolutely the worst conditions to start you “buy and hold” strategy, especially if you plan short period (5-10 years). If we are to believe history we should see a crash & a bear market (speculating 2-3 years), then another 1-2 years to return to present levels, and this will leave only 2-3 years to grow until your 10 year goal expires.

What this is telling us is not to stop investing, but to be informed and have reasonable expectations, that we are buying at absolute peak and long term return might suffer.