The S&P500 (SNPINDEX: ^GSPC) erased all doubts about a bull market when it hit a new all-time high on January 19. Stocks have continued to rise through the first half of the year, and the S&P 500 is currently near its peak.
High stock prices can make some investors nervous about putting their money into stocks. After all, every bear market, by definition, starts just after stocks hit an all-time high, so it feels like you could end up buying just as the market’s fortunes reverse.
But buying stocks when the S&P 500 hits a new all-time high has historically been a smart strategy. It can be a great opportunity to invest your extra money in the stock market now.
The most recent all-time high won’t be the last
There’s a good reason why almost everyone recommends investing in the stock market to grow your wealth. Stocks, as a group, increase in value faster over time than almost any other asset class.
Since stocks tend to rise over the long term, this means they will continually reach new all-time highs. And one all-time record usually leads to the next in short order.
Since hitting a new record high on January 19 earlier this year, the S&P 500 has set a new intraday high 30 more times this year. That number of new record highs is also not unusual. The S&P 500 has posted forty or more new record highs in a single calendar year nine times since the 1980s. And since we hit a new all-time high in January, it’s much more likely that this will be one of those years with a host of new all-time highs.
Not only do stocks typically continue to climb higher after hitting a new high, they actually rise faster than average. The S&P 500 has returned an average of 12.7% over a twelve-month period, following an all-time high. According to data analyzed by Fidelity Wealth Management, it averaged just 12.4% returns for all other twelve-month periods. If you sold your shares when the index hit a new all-time high, you could be missing out on a lot of returns.
The S&P 500 index is currently about 13% above the all-time high it reached in January. That could lead some investors to worry that the current bull market is about to run out. But remember that the above statistic describes the average of all new record highs. Some will have much better one-year returns – like the first in a series of new all-time highs – and some will have much worse one-year returns, like the last in a series. There is still a lot of room in the current bull market.
That becomes clear if you go back a step further. Investing on the day stocks hit all-time highs between 1988 and 2020 led to a total return of 50.4% after three years and 78.9% after five years, according to data analyzed by JPMorgan. That’s better than the S&P 500’s three- and five-year average returns of 39.1% and 71.4%, respectively, over the same period.
Investors can still earn very strong returns, even as stocks continue to set new records.
The best way to invest when stocks hit new all-time highs
Even as the stock market nears its all-time high, some companies’ shares will undoubtedly offer better value and potential returns than others. It can be trickier to spot these opportunities as more and more stocks soar higher, but it is possible to find them in almost any market environment.
For those who don’t want to dive into the stocks of individual companies and want to build a diversified portfolio of their own, it’s hard to go wrong investing in a broad-based index fund like the Vanguard S&P 500 ETF (NYSEMKT: VOO). The fund has a track record of closely tracking the S&P 500, and charges one of the lowest expense ratios in the industry.
The current bull market is driven by the returns of just a few company stocks. The ‘Magnificent Seven’ has been instrumental in driving new all-time highs for the S&P 500. The three largest companies in the index – Nvidia, MicrosoftAnd Apple — currently account for about 21% of the entire index.
Investors who want a more diversified portfolio should consider an index fund that tracks the S&P 500 Equal Weight Index, such as the Invesco S&P 500 Equal Weight ETF (NYSEMKT: RSP). The index weights all 500 components of the S&P 500 equally and is rebalanced quarterly, meaning Nvidia, Microsoft and Apple never account for much more than 0.6% of the fund’s investments.
There are dozens of ways to put your money to work while stocks are trading at all-time highs. If you want to grow your wealth over the long term, you can’t hesitate when stock prices move higher and hope for a fall. Chances are, stocks will continue to rise and you’ll miss out on years of great returns.
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Adam Levy has positions at Apple and Microsoft. The Motley Fool has positions in and recommends Apple, Microsoft, Nvidia and Vanguard S&P 500 ETF. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.
Is buying stocks when the S&P 500 hits a new all-time high a smart strategy? History provides a clear answer. was originally published by The Motley Fool
