Investing when the stock market is trading at or near all-time highs can be scary.
Investors who have been on the sidelines during the current bull market may regret not investing sooner. On the other hand, those with large sums of money in stocks may feel like the bull market is nearing its end, not its beginning. After all, all bear markets must start immediately after a stock hits a new all-time high.
But history suggests that now may be the best time to invest in stocks.
Stock prices tend to continue rising even after hitting a new all-time high
Stock prices generally rise over the long term. This requires constant new highs, so one high usually leads to the next. for example, S&P500 In 1995, it closed at an all-time high of 77 times. This represents approximately 30% of all trading days.
In 2024, the index has already closed at record highs 22 times through the first three months of this year. It wouldn't be surprising if the stock price continues to rise for some time, reaching new all-time highs.
The S&P 500 continues to rise an average of 14% a year after hitting a new historical high, according to data from Turist Advisory Services. The stock is currently trading around 8.5% above its all-time high set in January 2022, so there is plenty of room for further growth in the coming months.
It is also encouraging to look at the long-term outlook. Three years after hitting an all-time high, the S&P 500 index rose more than 50% on average, and five years later, it rose nearly 80%, according to data compiled by . JP Morgan. Moreover, these numbers are higher than the average return you would get from your investment on any given day. In other words, investing when the market reaches an all-time high is usually the best time to buy.
The best way to invest when the market reaches all-time highs
Individual stock investors may have a harder time finding better value in a market where stocks are trading at all-time highs than at the bottom of a bear market. Still, there's always an opportunity somewhere. Doing your research and learning about good companies trading at fair prices can pay off handsomely in the long run.
But even if you don't like researching and staying up-to-date on individual companies and their stocks, you can still benefit greatly by investing in a simple, broad-based index fund like Vanguard. S&P500ETF (NYSEMKT: VOO). Index funds track the returns of the S&P 500 very closely and charge a small fee to do so. This is one of the easiest and most effective ways to invest in stocks.
The current composition of the S&P 500 may mean that small and medium-sized companies have the greatest opportunity. The top 10 companies in the S&P 500 account for more than 36% of the entire index. This is a level of concentration that investors haven't seen since the 1970s. As such, the stock market's next rally could be driven by smaller companies catching up with the mega-cap stocks that have driven profits for the past few years.
By purchasing , you gain more even exposure to the other 490 or so members of the S&P 500. Invesco S&P 500 Equal Weight ETF (NYSEMKT: RSP). This index fund equally weights the stocks in the S&P 500 index and rebalances it quarterly. This gives you exposure to 491-500 stocks as much as the top 10 stocks. Historically, the Equal Weight Index has slightly outperformed the S&P 500 despite the strong performance of large companies over the past decade.
Whichever investment you want to make, buying stocks when the S&P 500 is trading at all-time highs can still be a great opportunity. And while we may regret missing out on the bull market earlier, history tells us that the market's rally is probably not over yet.
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Adam Levy has no position in any stocks mentioned. The Motley Fool owns a position in and recommends the Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
Is it wise to buy stocks when the S&P 500 is at an all-time high? “History Provides Clear Answers” was originally published by The Motley Fool
