Home » Investing » Is it Safe to Invest With the S&P 500 Hitting Record Highs?
Vanguard S&P 500 Index ETF (CAD-hedged) (TSX:VSP) is a great ETF for Canadian investors to bet on America’s bullish run.
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Joey Frenette
Joey Frenette is a journalist, University of British Columbia graduate, ex-engineer, Warren Buffett fanatic, and Fool who's completed CFA Level 1. He’s been investing since 2014 and is always on the hunt for value, regardless of the market "weather." Before writing at The Motley Fool, Joey worked as an analyst/developer at several Canadian small- and mid-cap software firms, including Syscon and Avigilon. Beyond Motley Fool, Joey’s work can be found at TipRanks and MoneyWise Canada. Follow him on Twitter @realJoeFrenette
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The S&P 500 is starting to eclipse highs that many folks may not have thought possible just a year ago. Undoubtedly, the tech-driven rally (thanks artificial intelligence [AI]!) has taken hold, and that so-called soft (or hard) landing doesn’t seem to be anywhere in sight? Could it be that central banks managed to land that economy in such a soft manner that nobody seemed to notice?
It’s definitely possible, but, of course, one shouldn’t rule out a bumpier tarmac at some point in the near future. In this piece, we’ll check out a few investments that I think are positioned to gain through the year, as they look to make up for lost time.
As the S&P 500 continues inching higher, surpassing the estimates of many, some profit-taking may be in order, if say, you’re heavily invested in the AI stocks that have more than doubled over the past year (or even just the past few months). If you’re up big with such winners, it certainly can’t hurt to play with the house’s money as the rally in some of the AI chip top dogs looks to get a bit long in the tooth. Either way, the S&P 500 doesn’t seem bubbly, as some may be inclined to believe.
Yes, it’s been a great run, with the S&P 500 at above 5,100. Over the past year, America’s top index is up a scorching 26.7%. But that in itself doesn’t suggest the stock market is overvalued and overdue for some sort of vicious pullback. Arguably, we experienced that (and a tech route) way back in 2022. When you look at the markets on a past-year basis, then sure, they look frothy, even overvalued. Many tech titans are trading at multiples well above their historic norms.
The S&P 500 is getting frothy … or is it?
When you take a further step back, however, you’ll see that the S&P 500 is only up 7.7% from its high hit at the very end of 2021. I don’t know about you, but a 7.7% gain in more than two years doesn’t seem all too absurd. Last year essentially saw the S&P 500 regain the losses it posted in 2022. And while there have been massive winners (and some losers), I’d argue that you don’t need to chase the overheated winners to do well in this market.
Though I believe another +25% year of gains is less likely for 2024, I think it’s a bad idea to cash out your investments just because stocks are at new all-time highs in the United States. There’s a good chance that 2024 could see double-digit percentage gains. And in that regard, I believe stocks are still worth owning.
If you’re a long-term thinker, perhaps allocating more capital towards cheap plays is warranted. Indeed, the beauty of self-guided investing is that you can continue to do well even as the rest of the market stalls out. Of course, it’s really hard to beat the S&P 500 consistently. But in Canada, it’s far easier to stock-pick your way to crushing the TSX Index, a market average that’s been far less hot of late.
A great way to bet on the S&P 500 as a Canadian investor
In short, I believe it’s safe to invest in the S&P 500 as a passive investor. Just be prepared to double down on any meaningful dips we’ll encounter on the road higher. I have no idea when the bumps will hit, but investors should be ready with cash on the sidelines.
Vanguard S&P 500 Index ETF (CAD-hedged) (TSX:VSP) is one of the best Canadian exchange-traded funds, or ETFs, to play the U.S. markets with a passive approach. Even at these heights, I view the ETF as a great pick if you’re a tad light on U.S. exposure.
With a low management expense ratio (MER) — that’s to be expected from Vanguard — and a currency hedge built in, the index makes for a great play if you’re a set-it-and-forget-it type of Canadian investor! Do be bullish on the U.S. markets over the long run, but don’t expect the pace of gains to last forever. They’re bound to slow at some point, perhaps with a correction thrown in. So, be ready to roll with the punches!
However, history says investors can safely buy stocks when the S&P 500 is near its record high. In fact, investors would have limited options if they wanted to avoid the stock market near its peak.
Historically, all-time highs have not been followed by significant selloffs. In fact, stocks have experienced better than average returns after reaching an all-time high. "New all-time highs have typically led to further all-time highs," says Naveen Malwal, institutional portfolio manager with Strategic Advisers LLC.
Over the past decade, you would have done even better, as the S&P 500 posted an average annual return of a whopping 12.68%. Here's how much your account balance would be now if you were invested over the past 10 years: $1,000 would grow to $3,300. $5,000 would grow to $16,498.
“In my view, for most people, the best thing to do is own the S&P 500 index fund,” Buffett said at Berkshire's 2020 annual meeting. Buffett's thinking here is straightforward. Most non-professional investors (and even many professional stock-pickers) have very little chance of outperforming the market.
Bottom line. S&P 500 index funds are some of the best investments for investors of all skill levels, but they can be especially beneficial for newer investors, who can enjoy solid returns without needing extensive expertise. Investors have a variety of cheap options to attain those tasty returns.
All-time record highs typically represent significant price news for companies and markets—investors may be enticed to purchase stock, believing the company will continue to perform well.
It is especially important to be prepared to change strategy when a security rallies to a new all-time high. New highs signals favorable conditions in which there is not oversupply in the form of shareholders who need to sell at a loss or to get even.
For example, if an investment scheme promises an 8% annual compounded rate of return, it will take approximately nine years (72 / 8 = 9) to double the invested money.
If you take your $100,000 and put it in an S&P 500 index fund, you could end up with over $1 million within 24 years if the index produces returns in line with its historical average. If you keep saving, you can get there even faster.
You would have more than doubled your money, with a total investment worth of $2,029.55. That's a 103% return, or a 7.23% annual rate of return. Interestingly, despite co*ke's dominance on the world stage, investing in co*ke's main rival, Pepsi, 10 years ago would have given you more pop for your buck.
The S&P 500's track record is impressive, but the Vanguard Growth ETF has outperformed it. The Vanguard Growth ETF leans heavily toward tech businesses that exhibit faster revenue and earnings gains. No matter what investments you choose, it's always smart to keep a long-term mindset.
It's not easy to beat the S&P 500. In fact, most hedge funds and mutual funds underperform the S&P 500 over an extended period of time. That's because the S&P 500 selects from a large pool of stocks and continuously refreshes its holdings, dumping underperformers and replacing them with up-and-coming growth stocks.
Historical Performance. Berkshire Hathaway: Has historically outperformed the S&P 500 over the long term under Warren Buffett's leadership. However, past performance doesn't guarantee future results.
According to our calculations, a $1000 investment made in February 2014 would be worth $5,971.20, or a gain of 497.12%, as of February 5, 2024, and this return excludes dividends but includes price increases. Compare this to the S&P 500's rally of 178.17% and gold's return of 55.50% over the same time frame.
The main drawback to the S&P 500 is that the index gives higher weights to companies with more market capitalization. The stock prices for Apple and Microsoft have a much greater influence on the index than a company with a lower market cap.
The result is that investing at market highs actually worked out well. That might be because the market sometimes continues hitting new highs. Plus, you're comparing those days against any random day, and most of those random days are not market bottoms.
All-time highs are a good opportunity to examine and manage your risk. All investors should consider rebalancing their portfolios, and active investors may consider hedging. Let's take a look at both. While a bull market may be great for portfolio growth, it may throw off your asset allocation.
For investors, returns on investments should be at least as high as the inflation rate. Otherwise, their investments are losing money even if they gain in dollar value. Similarly, individuals should ensure that their salaries keep pace with inflation; otherwise, they are losing buying power.
It ran 10,000 scenarios, using different asset allocations and time periods. Vanguard found that "in most historical market environments, investors would have been better off investing the lump sum all at once." This method outperformed dollar-cost averaging by a median of 1.2% to 2.2%, depending on asset allocation.
Introduction: My name is Geoffrey Lueilwitz, I am a zealous, encouraging, sparkling, enchanting, graceful, faithful, nice person who loves writing and wants to share my knowledge and understanding with you.
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