Is it smart to buy S&P 500 stocks 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 is nowhere to go but down. After all, every bear market starts, by definition, immediately after S&P 500 reaches a new historical high. But when stocks drop, it can be just as scary. It is not known how much further the stock prices will fall.

After a sharp pullback in the S&P 500 in early August, the index returned to its all-time highs. You might be kicking yourself for not buying on the leg. But even if you missed this short-lived opportunity, history suggests it’s still a great time to invest right now, even as the market hits new all-time highs.

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Stocks usually continue to rise after reaching an all-time high

Every investor knows that stocks increase in value over the long term. 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, investor expectations are that stocks will eventually hit even higher highs. The question is how quickly will stocks hit that new high? Some investors may worry that it may take a long time for these new highs to come, as every investor also knows that the stock market does not go up in a straight line.

But new all-time highs tend to cluster together. Once the market hits a new high, it often continues to rise for some time. In 1995, for example, the S&P 500 closed at a record high 77 times, which is about 30% of all trading days 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 January 19.

While the S&P 500 has already moved more than 16% higher since hitting its first new all-time high in more than a year in January, long-term returns could be even higher. The average bull market lasts 46 months, with an average total return of 110%. We are only 22 months from the October 2022 lows and are up 62%. If it averages out, this bull market could have another 2 years, rising another 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%. Over the next 24 months, it returned an average of 20.2%. This includes investing right at the top of the market before a new bear market. By comparison, investing at any other time resulted in average returns of 9% and 18.5% over 12-month and 24-month periods, respectively.

All of this means that 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 moves higher. There simply aren’t that many companies whose shares trade at an attractive value compared to the middle of a bear market. However, there are plenty of great opportunities that dedicated investors can find if they put in the effort.

However, digging into financial reports and studying the inner workings of various industries and the economic factors that might influence them is not for everyone. One of the most effective ways to invest, especially at a record level, does not require deep knowledge and understanding of several companies. You can buy a simple index fund that tracks a broad index like the S&P 500.

The Vanguard S&P 500 ETF (VOO 0.02%) is one of the best available. Its low expense ratio and strong track record of closely 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 are trading near all-time highs. It rarely pays to sit in cash and hope for a drop in prices before investing. Most of the time, stocks will continue to rise. That said, when there is a pullback, like we saw in early August, it usually works out well if you can take advantage of any excess cash you have to invest. There is no telling how long the opportunity will last, but it is virtually guaranteed that the stock market will continue to set new all-time highs in the long run.