The S&P 500 has risen for 4 consecutive months. Should you buy stocks now or wait for a pullback?

The S&P 500 is on the roll. Not only is the index up nearly 17% this year, it has also risen in each of the past four months.

For some investors, that momentum could be attractive. Others, however, may be nervous that the ride might stop. Should you buy stocks now or wait for a pullback?

Image source: Getty Images.

The case of waiting

Let’s first look at why you might want to wait for a pullback before buying stocks. One argument is that the market is about to pull back from its recent gains and ideally you would like to buy at lower prices.

There is some historical support for the view that markets should decline. As the chart below shows, the S&P 500 tends to experience a down month after several consecutive months of gains.

S&P 500 monthly return data by YCharts

There is even more to the story. September was by far the worst month of the year for the S&P 500. Since 1945, the index’s average return has been negative in only two months of the year — February and September. However, the average decline in September was three times greater than the average decline in February. History does not predict the future, but it is worth thinking about.

Perhaps the best argument for waiting to buy stocks, however, is valuation. The S&P 500 is currently trading near its second-highest level ever based on the cyclically adjusted Shiller price-earnings (CAPE) ratio. Historically, periods of below-average returns have frequently followed when the CAPE ratio has reached high levels, meaning that if things play out as expected, stocks could soon fall.

S&P 500 Shiller CAPE Ratio data by YCharts

Not surprisingly, Warren Buffett has more Berkshire Hathawayhis money in cash and short-term investments than ever before. He prefers to be more invested in stocks, but he only buys stocks when their valuations are attractive, and maybe he expects a pullback and wants to be prepared for it.

The case for buying shares now

But before you firmly decide to stay on the sidelines, it’s important to consider the case for buying stocks now. And there are some pretty strong arguments for doing so.

First, history is not such a great guide. Just because September has historically been a bad month for the S&P 500 doesn’t mean the index will always fall in September. Also, the average decline in the index in September is just 0.6% — not exactly a huge selloff.

Second, it is almost always useless to try to time the market. Sure, you might get lucky every now and then. However, Buffett once said, “Market timing is both impossible and stupid.” When one of the greatest investors of all time has to say about trying to time the market, it’s worth paying attention.

Third, investing in the S&P 500 has always delivered long-term results. You could have bought at the seemingly worst times in history (for example, right before the dot-com bubble burst or before the market crash of 2008) and still be a big winner if you held on long enough.

^ SPX data by YCharts

Try both options

Should you buy stocks now or wait for a pullback? The best strategy might be to combine both using dollar cost averaging. With this approach, you invest equal amounts on a regular basis, so you’re not putting all of your available cash into the market right now, but you’re not avoiding buying stocks altogether. With dollar cost averaging, you’ll buy big sometimes and small sometimes, and in the long run you’ll likely make solid profits.

Of course, where you invest matters a lot. Some stocks are not good long-term choices. Maybe their core business is not strong. Perhaps their growth prospects don’t justify their high valuations.

If you’re buying individual stocks, do your homework. If you want an easy alternative to picking individual stocks, invest regularly in a low-cost S&P 500 index fund that holds shares of all the companies in the index. However, the longer you are in the market, the higher your chances of winning.