The S&P 500 just hit an all-time high. History says this is his next move.

If you have money sitting around that you want to invest, you may have been slightly disappointed to see S&P 500 recently hit new highs. With the Federal Reserve now starting to lower interest rates, yields on money market funds and savings accounts are not as attractive as they were, and are likely to go down from here.

So you might be wondering if this is still a good time to invest in an exchange-traded fund (ETF) that tracks the S&P 500 like Vanguard S&P 500 ETF (VOO 0.44%). History has a clear answer and it may surprise you.

Invest in the S&P 500

Investing in a fund that tracks the S&P 500 like the Vanguard S&P 500 ETF has proven to be a great move over the years. The S&P 500 ETF has generated an average annual return of nearly 13% over the past decade, or nearly 239% on a cumulative basis. This is a strong and consistent track record that can make the ETF a core holding for any investor, regardless of experience.

In fact, the S&P’s performance comes despite the struggles of many individual stocks. In a report, JP Morgan found that between 1980 and 2020, more than 40% of stocks had negative returns. So why does the S&P do so well when many individual stocks falter? Because as a market-weighted index, it lets the winners run and they become a larger and larger percentage of the index over time. These mega winners ultimately drive the market higher.

This has proven to be a winning strategy, including during periods of Fed rate cuts. As long as the Fed’s tapering is not done in response to the recession and instead is part of a way to normalize monetary policy, stocks perform well after the Fed’s first rate cut. According to Carson Group research, the S&P 500 returned between 5% and 15% a year after the Fed’s first rate cut, when it did so as a way to normalize rates. Interestingly, the S&P performs best after rate cuts following a panic like 9/11 or the COVID-19 pandemic, which is a good data point on why investors shouldn’t panic when it comes to investments.

Image source: Getty Images.

Invest with stocks at all-time highs

So investing in the S&P 500 ETF has proven to be a winning strategy over time and during periods of rate cuts, but the market is now at an all-time high. It can’t be a good time to invest, can it? The answer is actually yes, it is a good time to invest. In fact, investing on days when the S&P 500 hits all-time highs can actually lead to tremendous returns.

According to another JP Morgan report from 1970, if investors invested in the S&P 500 only on the days it reached an all-time high, they would have an average annual return of 9.4% after 12 months and 20.2% after two years. By comparison, investing in the S&P 500 on any random day returned 9% after the first year and 18.5% after two years, so investing at the high has historically shown better investment returns.

Between 1988 and 2020, the outperformance of investing on days when the market hits an all-time high is even higher, with a return of 14.6% versus an 11.7% return for investing on random days. Additionally, during this period, investing on days when all-time highs occurred resulted in the investment making money 88% of the time over the next year, compared to 83% on a random day.

What JP Morgan’s research demonstrates is how bull markets last much longer than bear markets. The average bull market lasts about 46 months, which is about three times longer than the average bear market. Bear markets are a great time to buy stocks for the long term, but bear markets are also good opportunities to buy an S&P 500 ETF. If you waited to invest only in bear markets, you’d miss out on a lot of gains.

It’s time to invest

Investors shouldn’t be worried about investing in the Vanguard 500 ETF with the index hitting an all-time high because history tells us it’s a good time to invest. But regardless of market conditions, this is a great ETF to keep buying using a dollar cost averaging strategy over time. Steady investment will create long-term wealth.