Is the Vanguard S&P 500 ETF still a great investment, even with the stock market at an all-time high?

The S&P 500 It just hit a new all-time high, and if the current bull market continues, it probably won’t be the last anytime soon. But with lingering recession fears and other economic uncertainties, are stocks getting a little too expensive?

The Vanguard S&P 500 ETF (VOO -0.33%) it is one of the largest investment vehicles in the world and many investors consider it to be the backbone of their long-term investment strategy. But is now a good time to invest in the S&P 500, or should investors wait for a better opportunity? Here’s what you need to know.

The S&P 500 could get expensive

It’s not just that the S&P 500 is at an all-time high. But there are other valid reasons to think the index could get a little expensive. For example, the average S&P 500 stock trades for a P/E ratio of about 27.5 right now. This is the biggest since the early days of the COVID-19 pandemic, when earnings fell sharply. In the pre-pandemic years of 2016 through 2019, which were generally strong economic times, the S&P 500’s P/E ranged from about 19 to 24.

Additionally, the average S&P 500 stock trades at about 4.7 times book value, more than double valuation of the average small-cap stock. So it’s fair to say that the S&P 500 is expensive. But that doesn’t necessarily mean it’s a bad time to buy the Vanguard S&P 500 ETF.

Don’t try to time the S&P

A smart lesson to learn is that market timing is a losing battle. Just because a stock or index looks “expensive” doesn’t mean it can’t go higher or that a crash or pullback is imminent. Many investors thought the stock market was ridiculously overvalued in 2015 after it rebounded sharply from the financial crisis, only to see it double over the next five years.

In other words, just because the S&P 500 is now trading for a relatively high valuation, that doesn’t mean it’s at a peak, or close to one, for that matter. For example, if companies’ earnings grow rapidly over the next few years due to a declining interest rate environment, a P/E of 27 could be fully justified.

In addition, if you are a in the long term investor, history tells us that investing at a high valuation or a market peak is not the worst thing in the world. For example, probably the worst time to put money into the stock market in the past two decades is late 2007, just before the financial crisis sent the S&P 500 down 50% over the next year and a half.

If you had put your money into an S&P 500 ETF on the worst possible day (October 9, 2007), you would have a total return of 433% today. In other words, even with terrible buying timing just before the market fell off a cliff, the S&P 500 would have turned a $10,000 investment into $53,300 less than 17 years later.

Don’t put all your money in at once

With all of this in mind, it’s important to say that I’m not suggesting that you put all of your spare cash into the Vanguard S&P 500 right away or at any other time.

The whole point of buying an S&P index fund and holding it for the long term is to match the long-term performance of the stock market. And the best way to put yourself in a position to do that is to invest a little at a time.

A great strategy for investing in ETFs is known as dollar cost averaging, which involves investing a set amount of money in dollars at equal time intervals. For example, you could set up an automatic investment of $100 on the first day of each month.

By doing this, you guarantee yourself a mathematically favorable price over time. You will buy fewer shares of the ETF in months when it is relatively expensive and more shares when it is relatively cheap. Dollar cost averaging sets you up for long-term success regardless of what the stock market does.