The S&P 500 Is Near Record Highs. History Says That's Not a Good Reason to Stop Buying This ETF

The S&P 500 (^GSPC -0.19%) is hovering near record highs. For some investors, that raises the question of what to do with the money they want to put into the market.

Do you keep buying stocks and hope that prices can keep moving higher? Or do you wait for what’s likely an inevitable correction and invest at lower prices later?

Waiting sounds like a reasonable decision. After all, nobody wants to invest a lot of money today just to watch the market drop significantly only a short time later.

But history suggests record highs aren’t nearly as dangerous as they might seem.

Record highs have historically led to more gains

Fidelity recently conducted a study examining S&P 500 returns dating back to 1920. It found that investing on a day when the index closed at an all-time high produced an average return of 9.9% over the following year.

If you extend the holding period to three years, the average cumulative return increases to 36%. After five years, it’s 63%.

Surprisingly, those returns were actually slightly better than investing on days when the S&P 500 wasn’t at a record high.

There’s a simple explanation for this. The stock market has historically increased in value over long periods. That means record highs aren’t necessarily the end of a rally. They’re a natural product of stocks appreciating over time.

Consider that the S&P 500 has generated an average annual return of roughly 10% over the past century. That means a lot of times, new records have been followed by even higher records.

That’s why waiting for a pullback is generally a bad idea. Trying to time the market usually does more harm than good. And given the index’s long-term track record, it’s more likely that its next big move is higher, not lower.

Here’s the ETF I’d keep buying

Instead of trying to predict the next correction, I’d keep buying the Vanguard S&P 500 ETF (VOO -0.18%).

Buying stocks or exchange-traded funds (ETFs) near record highs certainly doesn’t eliminate risk. There’s still a possibility that stocks will fall, and any investor expecting to need their money within the next few years probably shouldn’t invest in the Vanguard S&P 500 ETF to begin with.

But that’s not a justification to stop investing altogether.

If your time horizon is a decade or more, I’d be more concerned about sitting on the sidelines waiting for a correction and missing out on further potential gains. Given the S&P 500’s history, record highs have not been a warning to stop buying stocks.