History Indicates Record Highs Are No Reason to Stop Buying This S&P 500 ETF

Key Points

The S&P 500 (SNPINDEX: ^GSPC) is hovering near record highs, prompting investors to question how to deploy new capital. Should one continue buying stocks in hopes of further appreciation, or should they wait for an anticipated correction to invest at lower prices?

Record highs have historically led to more gains

A recent Fidelity study analyzing S&P 500 returns since 1920 reveals that investing on a day the index closes at an all-time high yields an average return of 9.9% over the subsequent year. Extending the holding period to three years increases the average cumulative return to 36%, and to 63% after five years. Surprisingly, these returns slightly outperform those achieved on days when the index was not at a record high.

This occurs because the stock market historically appreciates over the long term; consequently, record highs are not the end of a rally, but rather a natural byproduct of ongoing growth. Given the index’s century-long average annual return of roughly 10%, new records are frequently followed by even higher ones. Attempting to time the market often proves counterproductive, and historical data suggests the S&P 500’s next significant move is more likely upward than downward.

Image source: Getty Images.

Here’s the ETF I’d keep buying

Rather than attempting to predict the next market correction, I would continue purchasing the Vanguard S&P 500 ETF (NYSEMKT: VOO).

While buying near record highs does not eliminate risk, and there remains a possibility of decline, investors with short-term liquidity needs should avoid this fund entirely. However, that risk does not justify halting investments altogether. For those with a time horizon of a decade or more, the greater danger lies in sitting on the sidelines waiting for a pullback and missing out on subsequent gains. Historically, record highs have never served as a definitive signal to stop buying stocks.

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