Should You Buy Stocks Now or Wait for a Pullback? History Offers a Clear Answer
Key Points
The S&P 500 is up this year, driven by tech and AI.
It has become much more expensive than its average.
Even so, time in the market beats timing the market.
The stock market continues to roll higher, and the S&P 500 (SNPINDEX: ^GSPC), Nasdaq Composite (NASDAQINDEX: ^IXIC), and Dow Jones Industrial Average (DJINDICES: ^DJI) -- the three most commonly used proxies for market health -- have all notched new highs recently. Although there's been some slight pullback over the past few weeks, all three indexes have delivered strong gains year to date.
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The lower Dow gain and higher Nasdaq gain indicate that the biggest gains are coming from the tech sector, and specifically, artificial intelligence (AI) stocks. However, many value stocks have been performing well, too, as they remain resilient in the face of inflation.
It's the fourth consecutive year of gains, and for the S&P 500, double-digit gains. That wouldn't be alarming if valuations remained constant, but as the market soars, it's also becoming more expensive. That's not sustainable over the long term, and some investors may fear that a crash or correction could be coming soon.
Should you wait for the pullback or invest at the high? History offers a clear answer.
Image source: Getty Images.
Consistency is key
History has shown, time and time again, that investing through every cycle leads to the best results. Since you can't time the market, you always need to be in the market. This year is an excellent example. The CAPE ratio, which adjusts the S&P 500 average P/E ratio for inflation, is at its second-highest level ever. The average since it's been recorded is 17.8, and it's currently at 41.1.
S&P 500 Shiller CAPE Ratio data by YCharts
When it peaked at 44 in 2000, the market crashed and lost value for three years in a row. If you're worried about a crash now, you might have wanted to bow out of the market already last year, when the ratio became highly elevated. However, if you had stopped investing at that point, you'd have missed out on the 18% gain the S&P 500 has returned over the past year.
Don't miss out on market gains
Short of timing the market, which is impossible, your best bet to maximize your investments is to keep investing, even when the market is expensive. Studies show that every rolling 20-year period since 1936 has had a positive return. Further, every 12-year period since 1972 has had a positive return.
That includes bull and bear markets, plus crashes and corrections. As the saying goes, time in the market is better than timing the market. Don't wait for the pullback; instead, be choosy about stocks today and set aside some cash to benefit from bargains when the pullback comes.
Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.