The S&P 500 Is 3% Below Its Record. Should You Buy Vanguard's Index Fund Now, or Wait for a Correction?

The S&P 500 (SNPINDEX:^GSPC) set its most recent record close on Aug. 13, finishing that session at 7,798.99. The index has slipped since then, and as of this writing, it sits about 3% below that mark.

For anyone holding cash, the slide raises a fair question. Is a 3% discount reason enough to buy the Vanguard S&P 500 ETF (NYSEMKT:VOO) now? Or is the smarter move to wait for a deeper pullback?

Not only did the fund become the first exchange-traded fund to surpass $1 trillion in assets in June, but it also took in about $69 billion of new money this year through early June. It owns the more than 500 stocks in the index it tracks (growth stocks and value stocks alike), charges a 0.03% expense ratio, and a single share costs around $693 as of this writing.

Here's what history says about buying this close to a record.

Image source: Getty Images.

Buying at record highs has paid off

A market within a few percentage points of its all-time high can feel like a market that has run out of room. History suggests otherwise.

JPMorgan Chase put numbers on this in a 2020 analysis of S&P 500 returns going back to the start of 1988. Investors who bought the index on a random day, reinvesting all dividends, made money over the following year 83% of the time, with an average 12-month total return of 11.7%. Investors who bought only on days the index closed at an all-time high did better on both counts. Those purchases made money over the following year 88% of the time, and the average return was 14.6%.

The pattern is less strange than it sounds. Bull markets tend to run in stretches, so an index strong enough to set one record has often been strong enough to keep setting them. And the study found the same pattern held over three-year and five-year holding periods.

In other words, the entry point that feels riskiest (the record close itself) has historically beaten the average day. Buying 3% below a record is, I'd argue, the same trade with a small head start.

Why not wait for a correction?

To be fair, deeper declines come along regularly. Fidelity examined S&P 500 drops from 1980 through 2025 and found declines of 5% or more in 93% of calendar years. Drops of 10% or more (the standard definition of a correction) showed up in 48% of those years -- essentially every other year.

But the same 46 years show why cash waiting for a correction tends to sit on the sidelines longer than planned. The index's largest drop within a year averaged about 14% over that stretch, and the S&P 500 still delivered an average calendar-year return of 13.3%.

The declines came, and the market finished higher in most years anyway.

Timing is the problem. A 10% correction measured from the Aug. 13 record would put the index just above 7,000, about 7% below its mid-September level. Of course, there's no guarantee the next correction starts anywhere near today's prices. If the index first climbs another 12%, a full 10% decline from that higher peak would still bottom out above where the market trades now.

Waiting is also two decisions, not one. The drop has to arrive before the market climbs past today's level. And then the money has to go in while the headlines are still ugly. By that point, buying rarely feels as easy as it sounds right now.

A pricey market is still worth buying

The caveat is the price. The Vanguard fund trades at about 27 times earnings.

That price assumes the big tech companies at the top of the index keep growing profits at an impressive rate. From a starting point this expensive, the next decade of returns may land below the market's long-run averages.

Should you buy the fund with the index about 3% below its record, though? For money that can stay invested for years, I think so.

Sure, the next 10% move (or bigger) could be down -- nothing in the past 46 years rules that out. But that history also suggests waiting for a better price often costs investors more often than it pays.

Ultimately, I'd buy the fund today -- perhaps dollar-cost averaging in. And if the market does serve up its next correction, I'd buy more.

JPMorgan Chase is an advertising partner of Motley Fool Money. Daniel Sparks and his clients do not have positions in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.