The S&P 500 Nears 5000: Is Now A Good Time to Invest in Stocks?
If the premarket futures are to be believed, today looks like the day when the S&P 500 could the 5000 level as I write this. Like most round numbers, 5000 isn’t all that significant from a logical perspective, at least for traders who are focused more on the small numbers that follow the 5k, but it is psychologically important for most investors. If nothing else, it may prompt those who are just starting out on their investing journey or who have cash to invest to ask themselves a question: Should I be buying stocks right now with the market at an all-time high?
The answer if you just starting out is an unequivocal yes. Even though I am both by nature and training a contrarian trader, for whom buying at what could well be the top of a move feels inherently wrong, that isn’t a factor when it comes to long-term regular investing. In some ways getting started is like having a baby: When you analyze it logically, there are always reasons why now is not a good time, but the long-term benefits are so enormous that the important thing is just to do it.
If you delay starting to contribute to a 401k or IRA because the market is “too high,” then when do you start? Is it on a 10% pullback? Or 20%? Whichever arbitrary number you choose, getting started when the market is struggling will seem like a bad idea too, and if you keep applying the logic of not starting on an upswing or a downswing, you will never invest. The important thing is just to start. If the market falls, you will still be buying on the way down, but if it continues to rise, you will have bought some stocks relatively cheaply.
Making small regular investments, which is what you inevitably do when contributing to a 401k or other retirement account, is known to investment professionals as “dollar cost averaging.” It takes the issue of timing out of the equation and enables you to benefit from the inevitable long-term upward trajectory of stocks in a capitalist system. There has never been a rolling twenty year period in the history of the stock market where stocks have lost money, so if you are starting to invest for a retirement thirty or forty years from now, you will show a return on money invested now, even if 5000 does turn out to be a top on this particular move at this particular time.
On the other hand, if you're already an investor and you have a lump sum to invest, the calculus is not so simple, particularly if your investing time horizon is not measured in decades. Should there prove to be a lot of resistance at the 5000 level and stocks do pull back from here, buying at or near the top could set you back substantially, which makes waiting a bit seem like a good idea. However, a pullback is not guaranteed. In fact, history tells us that it is unlikely:
Sharp, significant pullbacks in stocks happen because of unpredictable or unforeseen events like the credit crisis in 2008 or the pandemic in 2020, not because of proximity to a level. The same questions about whether or not to invest have been asked when the S&P 500 hit 2000, 3000, and any number of “significant” levels over the years, and yet here we are, asking at 5000.
In addition, if you are investing a lump sum, you still face the same question that those beginning to invest have to answer: if not now, then when? There is still no good answer to that question. The best idea, therefore, is to artificially create the beneficial circumstances that come from the regular investing that is inherent in 401k contributions by dollar cost averaging yourself. If you have, say, $10,000 to invest, then why not buy $2000 worth of stocks, ETFs, or whatever on the same day each month for the next five months? That way, if the market continues to power higher, you will have bought some as low as you could have, but if it falls, you will be buying at lower levels than you would have if you had jumped in feet first.
The thing to keep in mind is that despite great minds studying this for generations, nobody can know for sure where the market is going from one week or month to the next. What we do know for sure is that at some point in the future, stock indices will be higher. So, whatever your circumstances and even at the scary sounding 5k level, the time to start investing is now.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.