Despite a rocky start to September, the S&P 500 has come roaring back to set new all-time highs.
Investors down on themselves for missing the current rally may be wondering if it's still a good time to invest. It seems risky to buy stocks when their prices have never been higher. Investors are hesitant to buy at the potential peak and sit through the next bear market with their latest investment in the red for months or possibly years.
Waiting for a pullback can be equally paralyzing, though. There's no telling how long you'll have to wait for the market to drop from its new all-time high. And when it does start dropping, how will you know when to put your money to work with a new investment? Is a 5% pullback enough? 10%? Not only is it impossible to predict when the next downturn will happen, you won't know when it's time to jump in.
The good news for investors is investing when the S&P 500 hits an all-time high doesn't have to be scary. In fact, history shows that investors will do better if they invest when the index hits a new record.
An all-time high isn't the market peak
Every investor knows the stock market doesn't go up in a straight line. That's what makes investing at an all-time high somewhat scary. They also know, however, that stocks do go up over the long run, which is why it's worth tolerating the bumpiness of those returns.
In other words, the long-term expectation for stocks is that they should trade at an all-time high. Today's all-time high is just a stepping stone to tomorrow's all-time high. Tomorrow might literally be tomorrow, or it might be a week, a month, or even a year or more from now. But the odds are it's sooner rather than later.
New all-time highs tend to cluster together. Once the market reaches a new all-time high, it tends to keep going up for a long time. The S&P 500 closed at a record high 42 times through Sept. 27 this year. And that's far from an aberration. There were 12 other years when the S&P 500 set a new closing record at least 40 times since 1955.
If you had bought an index fund on the day the S&P 500 hit its first new all-time high since 2022 on Jan. 19 this year, your investment would be up about 18.5% already. Despite the strong run in stocks so far, there could be a lot more to come. The average total return for the S&P 500 24 months after hitting a new all-time high is 20.2% since 1970. Importantly, that's an average across all two-year periods starting from a new all-time high. That would include Jan. 19, 2024, as well as Sept. 26, 2024.
On the other hand, consider the risk of not investing in stocks when the S&P 500 hits a new all-time high. Moving to cash and waiting to invest for a month after stocks closed at an all-time high is a serious wealth destroyer. A $100 investment in 1926 would've grown to about $85,000 by the end of 2023, but if you moved to cash for the next month whenever the market reached an all-time high, and then reinvested whenever it wasn't at a new high, your return would be just $8,790, according to data compiled by Schroders. As famous fund manager Peter Lynch said, "Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves."
In other words, it's a bigger risk to not invest at all than to buy stocks trading at an all-time high.
How to invest when the S&P 500 is at an all-time high
Great individual stocks trading at an excellent valuation with strong prospects for future growth become harder and harder to find when the entire market is zooming higher every month. Still, investors willing to put in the work to research trends and companies, and focus on long-term potential, can do well buying individual stocks even if they're priced at an all-time high.
But if researching individual companies and their industries, and keeping a pulse on the macroeconomic factors that most influence them, isn't your thing, there are simpler options. One of the most effective ways to invest your money in stocks while the S&P 500 is at an all-time high is to buy a simple index fund.
You might consider the Vanguard S&P 500 ETF (NYSEMKT: VOO) if you simply want to track the returns of the S&P 500. And based on the data presented above, that should work out well for investors. Vanguard's expense ratio for the fund is a minuscule 0.03%, which means you'll pay just $0.30 per year for every $1,000 you invest in the ETF.
There are plenty of options no matter what style of investment you prefer. That said, deviating farther away from an index tracking the S&P 500 can produce much different results. Even so, there's no guarantee the major stock index hasn't hit a temporary peak (despite history suggesting it still has a long way to go). More often than not, investing when stocks hit an all-time high works out extremely well for investors. And if you can catch a pullback in shares like the one at the start of September, it's even better.
Over the long run, stocks go up. The current all-time high is just a stop on the way to the next all-time high.
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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 Provides a Clear Answer. was originally published by The Motley Fool