The S&P 500 has reached an all-time high: Should I invest now or wait for a correction?

Key Points

• There are more and less opportune moments to start investing in stocks.

• Bull and bear markets are a normal part of the stock market.

• The history of Wall Street tells a very compelling story: investing, at any time, is better than not doing it.

After three months without a winner, two different people will now share the Powerball prize of nearly 1.8 billion dollars. As lottery advertising often says, you have to play to win. However, the odds of winning that historic prize were approximately 1 in 292 million.

You have a much better chance of “winning” if you invest in the S&P 500, a fact that remains true even when the index is near all-time highs. Here’s why now is as good a time as any to start buying the S&P 500.

Don't let fear keep you away from the market

The purpose of the S&P 500 index is to be representative of the overall U.S. economy. A committee selects around 500 companies for the index that are considered large and economically significant according to certain criteria. The stocks of those companies are weighted by market capitalization and combined to form the index, providing a relatively fair representation of the overall U.S. economy. Investors can easily purchase the entire S&P 500 index through a mutual fund or an exchange-traded fund (ETF).

The S&P 500 is, in practical terms, what most people think of when they say “the market”. The truth is that the market tends to swing like a pendulum, alternating between bull and bear markets. Or, to put it more simply, good performance is usually followed by poor performance, and vice versa. This is partly due to economic and business cycles, but it also highlights the emotional nature of investing.

When things are going well on Wall Street, investors fear a trend reversal. The truth is that history suggests there will indeed be a change in performance. But that's how things are for investors. That shouldn't stop you from investing. The proof of this is highlighted in the following chart, which shows that the S&P 500 index has tended to rise over the long term. Even the worst downturns have ultimately been little more than bumps in the upward trajectory.

If you buy and hold for the long term, history suggests that you will continue to move forward. So if fear has you hesitant, it is probably better to start investing than to wait and try to calculate the “perfect” moment to become an investor.

There are good times and worse times to invest

That said, to be completely fair, there are better and worse times to invest. When the market is in a full bear market, stock valuations are, by definition, relatively attractive. In a bull market, prices are likely to be high. So, what would have happened if you had bought at the end of the last two major bull markets ( that also ended in very deep bear markets )?

If you had bought on the first day of trading in 2000, just before the dot-com crash, your profit today would be 345%. Not bad considering that the bear market of that period lasted until early 2003. What was the size of the drop? A decline of more than 40% in the S&P 500 index. It was a brutal time to be an investor, but if you had stayed in an S&P 500 indexed fund, like the SPDR S&P 500 Index ETF, you would have ended up well.

What if I had bought at the beginning of 2007, just before the bear market and the recession at that time? Note that this economic recession was so severe that there were legitimate fears that the entire global economic order would collapse. It was referred to as the Great Recession, in reference to the Great Depression. Once again, buying and holding the S&P 500 index, with an ETF like the Vanguard S&P 500 ETF, would have worked well. An investment in the S&P 500 on the first trading day of January 2007 would have left you today with a gain of about 355%.

How can the returns of the peaks just before those two crashes be so similar? The answer is that, after the market returned to equilibrium following the dot-com crash, it fell again during the Great Recession. It wasn't until 2013 that the S&P 500 finally surpassed the peaks reached in 2000 and 2007. In other words, it is a long time to wait for a recovery if one had invested at the peaks.

However, investing in what would have been very bad moments demonstrates the value of adopting a long-term approach to investing. Today, those two drops, which were enormous at the time, are a distant memory. Meanwhile, if you had continued to invest regularly throughout that time, what is known as dollar-cost averaging, and reinvested your dividends, you would have done even better. These are two key tactics that long-term investors adopt.

Bear markets happen, and yet you should invest for the long term

If you invest money in the market today, it is very likely that a bear market will arrive and leave you with paper losses. You may have to live with those paper losses for years. But history says that persevering and continuing to invest will result in solid long-term returns.

You can wait for a correction if you want, but being in the market tends to be more important. After all, knowing the exact moment to buy is as difficult as knowing the exact moment to sell ( and probably as difficult as hitting the Powerball lottery numbers ). Few on Wall Street have consistently timed the right moment on either side of the market's pendulum movement.