If you have money sitting on the sidelines you're looking to invest, you may have been slightly disappointed to see the S&P 500 recently hit new highs. With the Federal Reserve now beginning to lower interest rates, the yields on money market funds and savings accounts are no longer as attractive as they were and they are only likely headed lower from here.
So you may be asking yourself if this is still a good time to invest in an exchange-traded fund (ETF) that tracks the S&P 500 like the Vanguard S&P 500 ETF (NYSEMKT: VOO) . History has a clear answer and it may surprise you.
Investing in the S&P 500
Investing in a fund that tracks the S&P 500 like the Vanguard S&P 500 ETF has proven to be a great move over the years. The S&P 500 ETF has generated an average annual return of nearly 13% during the past decade, or nearly 239% on a cumulative basis. That's a strong, consistent track record that can make the ETF a core holding for any investor, regardless of experience.
In fact, the S&P's performance comes despite the struggles of many individual stocks. In a report, J.P. Morgan found that between 1980 and 2020, more than 40% of stocks had negative returns. So why does the S&P do so well when many individual stocks falter? Because as a market weighted index it lets its winners run and they become a larger and larger percentage of the index over time. These mega winners ultimately drive the market higher.
This has proven to be a winning strategy, including during periods of Fed rate cuts . As long as the Fed cuts aren't done in response to recession and instead are part of a way to normalize monetary policy, stocks perform well after the Fed's first interest rate cut. According to research from Carson Group, the S&P 500 has generated between a 5% and 15% return a year after the first Fed rate cut when done as a way to to normalize rates. Interestingly, the S&P performs the best after rate cuts following a panic, such as 9/11 or the COVID-19 pandemic, which is a good data point as to why investors should not panic when it comes to investing.
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Investing with stocks at all-time highs
So investing in the S&P 500 ETF has proven to be a winning strategy over time and during periods of rate cuts, but the market is now at an all-time high. That can't be a good time to invest, can it? The answer is actually yes, it is a good time to invest. In fact, investing on days the S&P 500 hits all-time highs can actually lead to outsize returns.
According to another J.P. Morgan report, since 1970, if investors only invested in the S&P 500 on days when it hit an all-time high, they would have an average annual return of 9.4% after 12 months and 20.2% after two years. By comparison, investing in the S&P 500 on any random day produced gains of 9% after the first year and 18.5% after two years, so investing at all-highs historically has shown better investment returns.
Between 1988 and 2020, the outperformance of investing on days when the market hits all-times high is even greater, with a 14.6% return versus an 11.7% return for investments on random days. In addition, during this period, investing on days where all-time highs occurred led to the investment making money 88% of the time over the next year compared to 83% on a random day.
What J.P. Morgan's research demonstrates is how bull markets last much longer than bear markets. The medium bull market lasts about 46 months, which is about three times longer than the average bear market. Bear markets are a great time to buy stocks over the long term, but bull markets are also good opportunities to buy an S&P 500 ETF. If you waited for only bear markets to invest, you'd be losing out on a lot of gains.
Time to invest
Investors should not be worried about investing in the Vanguard 500 ETF with the index reaching an all-time high, as history tells us this is a good time to invest. But regardless of the market conditions, this is a great ETF to continue to buy using a dollar-cost averaging strategy over time. Investing consistently will create long-term wealth.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy .
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