He S&P 500 (SNPINDEX: ^GSPC) It dispelled all doubts about a bull market when it reached 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 to work in stocks. After all, every bear market, by definition, begins just after stocks hit an all-time high, so it seems like you might 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 right now.
The most recent all-time high will not be the last
There is a good reason why almost everyone recommends investing in the stock market to increase your wealth. Stocks, as a group, increase in value over time faster than any other asset class.
Since stocks tend to rise over the long term, that means they will continually hit new all-time highs. And one all-time high usually leads to another in short order.
Since hitting a new all-time high on Jan. 19 earlier this year, the S&P 500 has posted new intraday highs 30 more times this year. That number of new records is not uncommon either. The S&P 500 has posted 40 or more new all-time 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 lot of new historical highs.
Not only do stocks typically continue to rise after reaching a new high, they actually rise faster than average. The S&P 500 has averaged a return of 12.7% in the 12-month periods following an all-time high. It averaged just a 12.4% return for all other 12-month periods, according to data analyzed by Fidelity Wealth Management. If you were to sell your shares when the index reached a new all-time high, you could lose a lot of returns.
The S&P 500 Index is currently about 13% above the all-time high it reached in January. This may leave some investors worried that the current bull market is about to lose steam. But remember, the statistic above describes the average of all new all-time highs. Some will have much better one-year returns, like the first in a series of new all-time highs, and others will have much worse one-year returns, like the last in a series. There is still plenty of room for maneuver in the current bull market.
That’s evident if you take a step back. Investing on the day stocks hit an all-time high between 1988 and 2020 generated a total return of 50.4% after three years and 78.9% after five years, according to data analyzed by JPMorgan. That beats the S&P 500’s three- and five-year average returns of 39.1% and 71.4%, respectively, over that same period.
Investors can still earn very solid returns even as stocks continue to set new records time and time again.
The Best Way to Invest When Stocks Hit a New All-Time High
Even with the stock market trading near its all-time high, shares of some companies are sure to present better value and potential returns than others. Spotting those opportunities can be more difficult as more and more stocks rise, but it’s possible to find them in virtually any market environment.
For those who don’t want to dive into the stocks of individual companies and build a diversified portfolio on 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 history of closely tracking the S&P 500 and charges one of the lowest expense ratios in the industry.
The current bull market has been driven by the stock returns of a few companies. The “Magnificent Seven” have played a huge role in generating new all-time highs for the S&P 500. The top three companies in the index… NVIDIA, microsoftand Apple — currently represent approximately 21% of the total index.
Investors who want a more diversified portfolio should consider an index fund that tracks the equal-weighted S&P 500 index, such as the Invesco S&P 500 Equal Weight ETF (NYSEMKT:RSP). The index equally weights all 500 components of the S&P 500 and is rebalanced quarterly, meaning Nvidia, Microsoft and Apple never make up much more than 0.6% of the fund’s holdings.
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 resist when stock prices rise and wait for a pullback. Chances are good that stocks will continue to rise and you will miss out on years of great returns.
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Adam Levy has positions at Apple and Microsoft. The Motley Fool holds positions in and recommends Apple, Microsoft, Nvidia, and Vanguard S&P 500 ETFs. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on 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