The S&P 500 (^GSPC 0.11%) has advanced 18% year to date, racking up more than three-dozen record highs in the process. Factors contributing to that upward momentum include excitement about artificial intelligence, cooling inflation, and the anticipation of interest rate cuts.
The index currently trades at 5,633, less than percentage point below its peak. That leaves investors with a difficult decision. Is it smart to buy stocks with the S&P 500 hovering near its record high? Or would it be more prudent to wait for a pullback?
Here's what Warren Buffett has to say.
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Warren Buffett says investors shouldn't wait for a drawdown to buy quality stocks
Warren Buffett has built Berkshire Hathaway (BRK.A 1.08%) (BRK.B 1.09%) into one of the largest companies in the world through prudent acquisitions and savvy stock purchases. Under his leadership, Berkshire shares have gained about 20% annually for almost six decades, nearly doubling the annual return in the S&P 500. That success makes him one of the greatest investors in American history.
Buffett is well known for his value-oriented philosophy. "Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down," he once wrote. However, Buffett does not avoid stocks when the S&P 500 is near its peak, nor has he recommended avoiding the market under those conditions.
In 1996, at Berkshire's annual meeting, an attendee asked Buffett whether it was necessary to wait for a downturn when buying stock in a thoroughly researched company. Buffett said, "I think it's better just to own them." In other words, there is no need to wait for a downturn. He qualified his advice by stipulating that only great companies are worth owning, and that their stocks must trade at reasonable prices.
Investors can get more insight by checking Berkshire's Forms 13F, quarterly paperwork that details what institutional investors are buying and selling. Year to date, the S&P 500 has hit over three-dozen record highs, but Berkshire has still added to its stakes in Sirius XM and Occidental Petroleum, and it started positions in Chubb, Heico, and Ulta Beauty. Buffett manages most of Berkshire's portfolio, so we can assume he bought stocks as the S&P 500 was notching new highs.
Here's the bottom line: Buffett once said, "The best chance to deploy capital is when things are going down." But he has indicated through words and actions that he is not opposed to buying stocks when the S&P 500 is near its record high, provided investors remember two rules: (1) The company must be worth owning and (2) the stock must be reasonably priced.
History says investors have nothing to fear from record highs in the S&P 500
Historical data supports the idea that it's OK to buy stocks when the market is near its peak. Between 1988 and 2023, the S&P 500 achieved an average one-year return of 13.4% after reaching a record high, but the index achieved an average one-year return of 11.9% during the entire 36-year period, according to data from JPMorgan Chase.
In other words, investors that bought an S&P 500 index fund between 1988 and 2023 would have been better off limiting their purchases to days when the S&P 500 hit a record high as opposed to buying on any random day. Interestingly, the pattern remains unchanged over longer holding periods, which dismisses the idea that the pattern is momentum-based.
For instance, the S&P 500 achieved an average three-year return of 48% following record highs, but the average three-year return was 40% during the entire period. Similarly, the S&P 500 achieved an average five-year return of 80% following record highs, but its average five-year return was 74% during the entire period.
The lesson here is that investors interested in buying an S&P 500 index fund have nothing to fear from record highs. In fact, peaks have historically been a good time to invest. Add to that the strong likelihood the Federal Reserve will cut interest rates this month, which has been a catalyst for the S&P 500 in the past, and now is indeed a good time to buy an S&P 500 index fund.
