Key Points
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The S&P 500 continues to set new all-time highs this year.
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Investing when the market is climbing into new territory doesn't mean that you're buying at a top.
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Historically, investing when the market is setting new all-time highs has produced slightly better near-term returns than waiting.
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The S&P 500 (SNPINDEX: ^GSPC) has been having another strong year. The index has set several new record highs just in August and is up more than 12% year-to-date.
For investors who currently have cash that they are waiting to invest, this situation creates a dilemma. Buy now and you could potentially be buying near the top. Or you could wait for a correction that may never come.
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Using history as a guide, one of these paths has worked out much better than you might think.
Buying at an all-time high hasn't been a bad strategy
An all-time high might sound like a bad time to be buying stocks, but there's a flaw in that thinking.
Stock prices tend to rise over the long-term. So during the course of a healthy bull market run, the S&P 500 could reasonably be expected to hit numerous new highs. This is usually a sign of strength, not necessarily a sign that prices are overvalued.
J.P. Morgan examined S&P 500 returns since 1970 and found that forward-looking returns when investing at all-time highs were slightly higher than when investing at non-highs. People investing at an all-time high earned an average return of 9.4% over the subsequent 12 months compared to a 9% return when the market wasn't at record highs.
Extend the measurement period to two years and the difference becomes even larger: 20.2% following record highs versus 18.5% following non-high days.
In short, buying at the top hasn't historically been the problem investors think it might be.
Waiting for a pullback creates another risk
Of course, the S&P 500 could fall at any time.
U.S. stocks are expensive by several valuation measures, including the Shiller CAPE (Cyclically Adjusted Price-to-Earnings) ratio, which looks at the price of the S&P 500 relative to its inflation-adjusted earnings over the past 10 years.
By that metric, the U.S. stock market is more expensive today than it has been at any point in history except for the peak of the dot-com bubble. Higher interest rates, geopolitical uncertainty, and high expectations around artificial intelligence (AI) could all trigger volatility.
But waiting for a correction requires making two correct decisions.
First, you need to be right in your anticipating that the stocks you want to buy will drop to lower levels than they're currently trading at. Second, you need to be right in deciding when to actually buy them. Picking those moments using a time strategy requires a high level of discipline and luck. Getting them right is something that few investors are able to do, let alone do consistently.
What I'd do with $10,000 today
If I had $10,000 that I planned to keep invested for at least the next 10 years, I wouldn't wait to buy stocks with it just because the market is at an all-time high now.
I'd be perfectly comfortable putting that cash into a low-cost S&P 500 ETF, such as the Vanguard S&P 500 ETF (NYSEMKT: VOO).
That doesn't mean that there's not the potential for a correction or even a bear market in the near to medium term. Pullbacks are normal and should be expected. But history does suggest that the market trading at an all-time high shouldn't be read as a warning sign to avoid investing in stocks, especially if you're buying and holding for the long term.
High valuations, mixed economic conditions, and your personal time horizon are all factors you'll want to consider. But the S&P 500 being at or near an all-time high isn't a particularly good reason to stay on the sidelines.
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David Dierking has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.