Is it smart to buy stocks with the S&P 500 near record highs? Warren Buffett has brilliant advice for investors.

The S&P 500 (SNPINDEX: ^GSPC) has advanced 18% year to date, hitting more than three dozen records in the process. Factors contributing to this upward momentum include enthusiasm for artificial intelligence, cooling inflation and anticipation of interest rate cuts.

The index is currently trading at 5,633, less than a percentage point below its peak. That leaves investors with a difficult decision. Is it smart to buy stocks with the S&P 500 approaching record highs? Or would it be more prudent to wait for a pullback?

Here’s what Warren Buffett has to say.

Warren Buffett says investors shouldn’t wait for a discount to buy quality stocks

Warren Buffett built Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) into one of the world’s largest companies through prudent acquisitions and smart stock purchases. Under his leadership, Berkshire’s stock gained about 20% annually for nearly six decades, nearly doubling the annual return of the S&P 500. This success makes him one of the greatest investors in American history.

Buffett is well known for his values-oriented philosophy. “Whether it’s socks or stocks, I like to buy quality merchandise when it’s on sale,” he once wrote. However, Buffett does not avoid stocks when the S&P 500 is near its top, nor has he recommended avoiding the market under those conditions.

In 1996, at Berkshire’s annual meeting, an attendee asked Buffett whether he should expect a decline when buying shares in a closely researched company. Buffett said, “I think it’s better just to own them.” In other words, there is no need to wait for a recession. He qualified his advice by stating that only great companies are worth owning and that their shares should trade at reasonable prices.

Investors can get more information by checking Berkshire’s 13F forms, quarterly documents that detail what institutional investors are buying and selling. The S&P 500 has hit more than three dozen record highs to date, but Berkshire has continued to add to its stake in Sirius XM and Occidental Petroleumand started positions in Chubb, Heikoand The ultimate beauty. Buffett manages most of Berkshire’s portfolio, so we can assume he bought stocks as the S&P 500 was hitting new highs.

Here’s the bottom line: Buffett once said, “The best chance to deploy capital is when things are going down.” But he has indicated through words and actions that he is not opposed to buying stocks when the S&P 500 is near record highs, as long as investors remember two rules: (1) the company must be worth owning and (2) the stock must be reasonable. price.

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History says investors have nothing to fear from the S&P 500’s record highs

Historical data supports the idea that it is okay to buy stocks when the market is near the top. Between 1988 and 2023, the S&P 500 averaged a one-year return of 13.4% after hitting a record high, but the index averaged a one-year return of 11.9% over the entire 36-year period , according to data from JPMorgan Chase.

In other words, investors who bought an S&P 500 index fund between 1988 and 2023 would have been better off limiting their purchases to days when the S&P 500 hit a record high, as opposed to buying on any random day. Interestingly, the pattern remains unchanged over longer holding periods, which refutes the idea that the pattern is based on momentum.

For example, the S&P 500 achieved a three-year average return of 48% after record highs, but the three-year average return was 40% over the entire period. Similarly, the S&P 500 achieved a five-year average return of 80% after record highs, but its five-year average return was 74% over the entire period.

The lesson here is that investors interested in buying an S&P 500 index fund have nothing to fear from record highs. In fact, tops have historically been a good time to invest. Add to that the strong likelihood that the Federal Reserve will cut interest rates this month, which has been a catalyst for the S&P 500 in the past, and now is indeed a good time to buy an S&P 500 index fund.

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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, JPMorgan Chase and Ulta Beauty. The Motley Fool recommends Heico and Occidental Petroleum. The Motley Fool has a disclosure policy.

Is it smart to buy stocks with the S&P 500 near record highs? Warren Buffett has brilliant advice for investors. was originally published by The Motley Fool