Should You Invest in the S&P 500 Right Now or Wait? There’s 1 Clear Answer

The S&P 500 (^GSPC -1.09%) has generated an average annual total return of about 10% since its inception in 1957. However, the index has also gone through some wild swings over the past seven decades — and those downturns shook out many long-term investors.

Over the past 12 months, the S&P 500 has risen 15% and trades just 2% below its all-time high. It also trades at 21 times forward earnings, compared to its average forward multiple of 17 for the past 25 years. Those numbers suggest it might not be the best time to invest in the S&P 500 via an exchange-traded fund (ETF) such as Vanguard’s S&P 500 ETF (VOO -1.10%).

However, the S&P 500 has also consistently rewarded investors who simply tuned out the near-term noise, stayed invested through downturns, and focused on the long-term gains. So should you invest in the S&P 500 today, even though it looks historically expensive?

Why is the S&P 500 such a resilient investment?

The S&P 500 includes the 500 largest companies in the United States. To join that elite club, they must have a market cap of at least $22.7 billion, have been profitable for at least the past four quarters, and have adequate liquidity and trading volume.

A company can’t join the index until 12 months after its IPO, and at least 10% of its shares must be publicly traded. It also excludes certain companies — including master limited partnerships (MLPs), business development companies (BDCs), and closed-end funds (CEFs) — which don’t issue common stock.

The S&P 500 rebalances itself quarterly to add rising stars and prune its laggards, and adjusts their weights based on their market caps. Over the long term, most actively managed funds struggle to outperform the S&P 500’s automated indexing strategy.

That’s why Vanguard’s founder, John Bogle, advised investors to simply “buy the haystack” instead of searching for individual needles. Today, the S&P 500’s biggest components include Nvidia (8.4% of the index), Apple (7.4%), Microsoft (5.8%), Amazon (3.7%), and Alphabet (3.1%). That makes it an easy way to gain instant exposure to the country’s top companies without having to do too much homework on each stock.

But is there a “right” time to invest in the S&P 500?

The S&P 500 is a balanced investment for long-term investors, but they must be able to withstand double-digit drawdowns without panicking. Over the past two decades, the S&P 500 experienced peak-to-trough declines of 57% from Oct. 2007 to March 2009, 34% from Feb. to March 2020, and 25% from Jan. 2022 to Oct. 2022.

However, the S&P 500 has generated a total return of 686% (including reinvested dividends) since its first trading day in 2007, and a total return of 162% since the first day of 2020. Even if you had invested in VOO on Jan. 3, 2022 — the day the S&P 500 peaked before the Fed’s interest rate hikes crashed the market throughout most of the year — you’d still be sitting on a total return of 71%. Therefore, investors who sold their stocks during the nadir of each of those downturns are probably kicking themselves for leaving so much money on the table.

So if you plan to stay invested for at least a few more years, you shouldn’t worry about timing the perfect entry point. Instead, it’s smart to start a position in the S&P 500 today, commit to investing more every month, and let dollar-cost averaging smooth out your long-term gains.

Leo Sun has positions in Amazon and Apple. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Microsoft, Nvidia, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.