Past trends can give us some insight into what might be coming next.
Recently, the S&P 500 has faced challenging days. After hitting record highs, benchmarks took a dip, largely due to investor concerns about high tech stock valuations and worries about a potential artificial intelligence (AI) bubble. Adding to the unease was a government shutdown lasting over 40 days, which left investors without access to the latest economic reports. Without this data, it’s tough to gauge the economy’s current status.
That said, it’s worth noting that the S&P 500 is still hovering near its all-time high, and several stocks that have dipped recently could see significant gains this year. Take Palantir Technologies, for instance: though it has dropped 16% since the month began, it’s up around 120% year-to-date. Meanwhile, the alphabet recently reported robust quarterly profits and has a positive outlook for the near future.
So, in light of the recent turmoil, the S&P 500 is still positioned to do well this year. But should you invest in it now? How does the Vanguard S&P 500 ETF (VOO +0.36%) fit into this picture? Let’s look at what history indicates about buying at market highs.
One purchase, many stocks
First, let’s dive a bit into the Vanguard S&P 500 Exchange Traded Fund (ETF) and the concept of ETF investing. ETFs can be appealing because they allow you to invest in a range of stocks with just one transaction, providing instant diversification. I think diversification is particularly valuable because, when times are tough, while some stocks or sectors may falter, others can remain steady or even thrive, which helps to cushion your portfolio against declines.
ETFs are structured around various themes, industries, and indexes. This means you can opt for a dividend stock ETF, a biotech-focused ETF, or, in this case, an ETF that mirrors a particular index’s performance. Another plus is that ETFs trade daily like stocks, though you should keep in mind the fees associated with them, known as the expense ratio. Selecting one with an expense ratio under 1% can help ensure that fees don’t nibble away at your potential profits over time.
Tech stocks rise
Now, let’s look at the Vanguard S&P 500 ETF again. Much like the S&P 500 itself, the tech companies within it are trading near all-time highs. Nvidia and broadcom have made significant strides recently. The fund consists of 11 different industries, which offers a decent level of diversification, but currently, tech stocks dominate its composition. Of course, this could shift, as indexes and funds regularly adjust to include the most relevant companies of the moment. This adaptability is beneficial because it allows you to invest in the most robust firms.
But is now really the right time to invest in the Vanguard ETF? Historical trends provide insight: when markets peak, a decline often follows. For instance, tech stocks led the late 1990s market boom, but once the bubble burst, the S&P 500 plummeted over 40% within two and a half years. More recently, the S&P 500 saw nearly a 20% rise in 2022 after bouncing back from the pandemic-induced market crash and hitting new highs by the end of 2021.
Here’s some positive news
So, while history suggests that buying into the S&P 500 at peak prices typically leads to downturns, there’s an upside. These declines tend to be followed by recoveries and gains. Simply put, long-term investors tend to succeed when they invest in the S&P 500 over time.
However, one big caveat is the unpredictable nature of peaks and declines. At this moment, the S&P 500 Index may have just hit its all-time high, and it could either drop further or rebound and surpass its current level in the coming months.
What does this mean for you as an investor? If you’re planning to stay invested for several years, you don’t need to stress about timing the market or predicting which way it will swing next. You can invest in the Vanguard S&P 500 ETF at any time—even at these market highs—because the historical evidence suggests a favorable outlook in the long run.
