Is It Smart to Buy Stocks With the S&P 500 at an All-Time High? History Has a Clear Answer
Trying to determine the best time to invest your hard-earned money can be a daunting task.
When the stock market hits a new high, it seems like there's nowhere to go but down. After all, every bear market begins, by definition, just after the S&P 500 hits a new all-time high. But when stocks fall, it can be equally scary. There's no telling how much further stock prices will drop.
After a sharp pullback in the S&P 500 in early August, the index has roared back toward its all-time highs. You might be kicking yourself for not buying on the dip. But even if you missed out on that short-lived opportunity, history suggests it's still a great time to invest right now, even as the market pushes to new all-time highs.
Stocks usually keep going up after hitting an all-time high
Every investor knows stocks increase in value over the long run. Why else would you invest if you didn't expect your investment to increase in price?
So, even when stocks are trading at an all-time high, the expectation from investors is stocks will eventually reach even higher highs. The question is how quickly will stocks reach that new higher high? Some investors may worry that it may take a long time for those new highs to come because every investor also knows the stock market doesn't go up in a straight line.
But new all-time highs tend to cluster together. Once the market reaches a new high, it often keeps going up for some time. In 1995, for example, the S&P 500 closed at a record high 77 times, which comes out to approximately 30% of all trading days in that year. The S&P 500 has closed at a new all-time high 38 times so far in 2024 since setting a new high on Jan. 19.
While the S&P 500 has already moved more than 16% higher since hitting its first new all-time high in over a year in January, the long-term returns could be even greater. The average bull market lasts 46 months with a median total return of 110%. We're only 22 months out from the lows of October 2022 and up 62%. If it holds to the average, this bull market could have another 2 years to go, rising an additional 30% from here.
In fact, investing when the S&P 500 hits a new all-time high has historically led to stronger results than investing on days when it doesn't hit a new all-time high. Since 1970, in the 12 months following a new all-time high, the S&P 500 has produced an average return of 9.4%. In the following 24 months, it returned 20.2% on average. That includes investing at the very peak of the market before a new bear market. By comparison, investing at any other time resulted in average returns of 9% and 18.5% for 12-month and 24-month periods, respectively.
All this is to say, now is a great time to invest in the stock market.
How to invest when the stock market is trading at an all-time high
It can be difficult to find good individual stock investments as the overall market climbs higher. There simply aren't as many companies whose stocks are trading at an attractive value compared to the middle of a bear market. Still, there are plenty of great opportunities for dedicated investors to find if they put in the work.
However, digging into financial reports and studying the inner workings of various industries and the economic factors that could influence them isn't for everyone. One of the most effective ways to invest, particularly at an all-time high, doesn't require deep knowledge and understanding of multiple companies. You can buy a simple index fund that tracks a broad index like the S&P 500.
The Vanguard S&P 500 ETF (NYSEMKT: VOO) is one of the best available. Its low expense ratio and strong record of tightly tracking the index ensure you'll earn returns very close to the S&P 500. And, as history shows, those returns can be quite strong, especially after setting a new all-time high.
There are dozens of ways to invest your money when stocks trade near an all-time high. It rarely pays to sit on cash and hope for a pullback in prices before investing. More often than not, stocks will continue to push higher. That said, when there is a pullback like we saw in early August, it usually works out well if you can seize the opportunity with any excess cash you have to invest. There's no telling how long the opportunity will last, but it's virtually guaranteed that the stock market will keep setting new all-time highs over the long run.
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Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
Is It Smart to Buy Stocks With the S&P 500 at an All-Time High? History Has a Clear Answer was originally published by The Motley Fool