Determining the best time to invest your hard-earned money in the stock market can feel like a daunting task.
The common advice “time in the market beats timing the market” is easy to say but hard to follow when stocks trade near their all-time high as they do today. It might seem like stocks can’t possibly climb any higher after the S&P 500’s (SNPINDEX: ^GSPC) incredible 70%-plus run since hitting a bear market bottom in 2022. For some, it may feel like another bear market could be right around the corner. After all, every bear market starts when the market hits a new high.
Investors who missed that 70% increase in stock prices may be sitting on the sidelines, waiting for that bear market to take hold before putting their cash to work. Investors who managed to stay invested up to this point may be feeling like they’re tempting fate and considering taking some money off the table.
But history has a clear answer for investors wondering whether it’s a smart idea to put your money in stocks right now.
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The basic idea behind investing, especially investing in a broad-based index fund, is that stocks, as a group, increase in value over time. Economic progress and expansion isn’t always a steady march, but they typically move forward. As such, the companies that make up the economy see growing profits, and their stocks increase in value.
So, even if stocks are trading at an all-time high, the expectation going forward should be for stocks to set even higher highs in the future. Unless there’s a good reason to expect a big slowdown in the economy negatively impacting the earnings and cash flow of the businesses operating in it, stocks will continue to move higher in short order.
Indeed, new all-time highs tend to cluster together. That’s certainly been the case since the market set a new all-time high in January of last year. About 13 months later, the index has closed at a new all-time high 58 times.
If you had invested in an S&P 500 index fund when it first set a new all-time high in 2024, your fund would be up about 26% as of this writing. And while that’s a phenomenal return for just 13 months, it could be just the start for this market. The median bull market lasts 46 months. That gives us about a year and a half until the current bull market reaches the 50th percentile.
What’s more, despite the strong returns experienced in the first two years of the current bull market, they’re not entirely out of the ordinary. The median total return for a bull market is 110%, with the majority of that coming in the first half of the recovery from the previous bear market. That suggests the S&P 500 could climb another 23% from here, and it would still only be an average bull market.
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Importantly, there’s no need to wait for even a slight pullback in stock prices to put your money in the market. In fact, waiting for a better price could be detrimental to your returns. Data compiled by J.P. Morgan found relatively little difference in the three-month, six-month, and 12-month returns from those investing in the S&P 500 at an all-time high versus any other day since 1970. However, those investing at an all-time high achieved 20% average returns over the subsequent two-year period versus 18% for those investing on non-all-time high days.
Keep in mind that’s the average two-year return. The returns achieved by investing at earlier all-time highs will be much greater, while the returns from the most recent high mark could be negative. As such, it’s not unreasonable for investors to expect two-year returns of more than 40% from the first all-time high in a series. And as mentioned, stocks are currently only up 26% from the all-time high set in January last year.
Investing when stocks are trading at an all-time high can be a lot more difficult than finding a good investment when stocks are near their relative lows. There are simply a lot more opportunities in the depths of a bear market for patient investors. Finding stocks after a strong bull market run requires more careful consideration of what you’re buying.
That’s especially true in this bull market where investors have seen stock prices climb faster than the underlying fundamentals for many of the largest companies. The S&P 500 trades with a forward price-to-earnings ratio of about 22.2. That’s well above its long-term average valuation, and the biggest companies, like the “Magnificent Seven,” trade for a much higher earnings multiple. While that doesn’t necessarily mean they’re overvalued, or the entire market is going to come crashing down anytime soon, it does mean investors need to be aware of the potential risk and upside at these prices.
So, you could invest in a simple S&P 500 index fund like the Vanguard S&P 500 ETF (Nysemkt: flight). That’s a great option, and history suggests there’s still a lot of growth left to come for the index. With a low expense ratio and a strong history of tracking the index closely, you’re sure to get your fair share of broad market’s returns. History suggests those returns could be considerable, too.
However, if the valuations of the biggest companies in the market are a concern to you and you want to be more judicious with your investments without picking individual stocks, you could buy an equal-weight S&P 500 index fund like the Invesco S&P 500 Equal Weight ETF (Nysemkt: RSP). The index fund invests an equal amount into each of the components of the S&P 500, which decreases the concentration in the big, high-value stocks that have led the market over the last two years. This alternative approach historically outperforms over the long run, but there are periods when it lags the traditional cap-weighted index.
There are dozens of ways to invest your money when stocks are trading at an all-time high. Very rarely will it work out in your favor to remain on the sidelines for very long. However, taking the time to be prudent with your investment choices should put you in a position to do well, even if the market enters a downturn.
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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
