Stock Market's S&P 500 Index Reaches Another Peak. Pondering Over Delaying Investment in It until New Year's Eve?
Following a significant drop of over 18% in 2022, the S&P 500 has seen a remarkable recovery over the past two years. In 2023, the U.S.'s primary stock market index rose by over 24%, and so far in 2024, it has surpassed this with a gain of over 26%.
With this impressive run in 2024, the S&P 500 has reached a new peak, exceeding 6,090. On one hand, hitting a new high for the index is a cause for celebration for the millions of investors involved. On the other hand, hearing about an 'all-time high' can sometimes instill a sense of caution about investing at that moment.
If you're uncertain about investing in the S&P 500 as it approaches all-time highs, here's why you shouldn't be wary.
Avoid trying to predict market movements
When it comes to deciding whether to wait to invest due to the index or stock reaching a new high, it often boils down to assumptions and attempting to predict market movements. Both of these are things you should ideally steer clear of as an investor.
Many individuals who pose this question believe that touching an all-time high makes the index or stock more likely to decline, and they'd rather wait until it does, so they avoid investing before a price decrease. That's market timing.
Timing the market may seem like a reasonable approach, but predicting stock market performance, especially in the short term, is impossible. Not even the most experienced and successful investors can accurately predict market movements.
To illustrate this, the S&P 500 reached over 50 new record highs in 2024, with the first one occurring on Jan. 19. Hesitating to invest at any of these points (except for the last one) would have led to poorer performance compared to investing at the high.
Focus on consistency
Instead of trying to anticipate the S&P 500's performance and time your investments, a better approach is to practice dollar-cost averaging. This involves deciding on a set investment amount and investment schedule that work for you, then sticking to it regardless of stock prices at the time.
For example, suppose someone has $400 they can commit to investing in the S&P 500 each month. Using dollar-cost averaging, they could decide to invest $100 every Monday, $200 every other Friday, or $400 at the beginning of each month.
The frequency you choose isn't crucial; it's about what makes sense for your financial situation. What matters, however, is being disciplined to stick to your investment schedule, no matter the market conditions. Whether the S&P 500 is at an all-time high, in a correction, or stagnant, invest.
By employing dollar-cost averaging, you reduce the impact of volatility. At times, you'll invest during periods of overvaluation, while other times, you'll invest during periods of undervaluation. The idea is that it will even out over time and reduce stress because you're not trying to time the market and risk being on the wrong side of the bet.
When in doubt, remember this quote: "Time in the market beats timing the market."
My preferred method for investing in the S&P 500
There are several ways to invest in the S&P 500, but my preferred choice is the Vanguard S&P 500 ETF (VOO 1.18%).
S&P 500 exchange-traded funds (ETFs) closely replicate the same index, so there isn't much noticeable difference between them besides cost. I like the Vanguard ETF because its expense ratio is a mere 0.03%. That's more than three times cheaper than the more popular SPDR S&P 500 Trust ETF, which has an expense ratio of 0.0945%.
The Vanguard S&P 500 ETF is a low-cost option with plenty of liquidity, ensuring you can easily buy and sell shares without significant price fluctuations. You can't ask for more from an ETF.
Despite the S&P 500 reaching new highs, it's important to avoid trying to predict market movements as this approach is often unsuccessful. Instead, focusing on consistent investment strategies like dollar-cost averaging can help reduce the impact of volatility. For instance, investing a set amount at regular intervals can help even out returns over time, regardless of market conditions.
If you're looking for a low-cost ETF to invest in the S&P 500, the Vanguard S&P 500 ETF (VOO) is a strong option due to its low expense ratio and high liquidity. With a fee of only 0.03%, it outperforms many other ETFs in terms of cost-effectiveness.
