Should You Buy Into the Vanguard S&P 500 ETF Now? Here's What History Says About Buying at Market Highs

In recent weeks, the S&P 500 has experienced some difficult days. The benchmark slipped from record highs as investors worried about the mounting valuations of tech stocks and the possibility of an artificial intelligence (AI) bubble forming. The government shutdown, which lasted more than 40 days and cut off access to the latest economic reports, also weighed on investor sentiment -- without data, investors weren't able to get a clear picture of the current economic situation.

But it's important to keep in mind that the S&P 500 still is very close to its record high, and many stocks that have slipped in recent days are set to register big gains for the year. For example, Palantir Technologies, down 16% since the start of the month, has climbed about 120% this year. Companies from Palantir to Alphabet also have reported strong quarterly earnings growth and are optimistic about their prospects in the coming months.

So, in spite of the turbulence we've seen lately, the S&P 500 is on track for a fantastic performance this year. Does this mean you should buy into the Vanguard S&P 500 ETF (NYSEMKT: VOO) now? Here's what history says about buying at market highs.

Image source: Getty Images.

One purchase, many stocks

First, though, let's talk a bit about the Vanguard S&P 500 exchange-traded fund (ETF) and ETF investing in general. ETFs allow you to invest in many stocks with just one purchase, and this is fantastic because it offers you instant diversification. I like diversification because, in times of trouble, if one particular stock or sector is suffering, others may hold up or even gain -- and all of this will limit or prevent declines in your portfolio.

ETFs are organized around themes, industries, or indexes -- so, for example, you could buy a dividend stock ETF, or one that focuses on biotech, or, in the case we'll consider here, an ETF that tracks the performance of a certain index. It's easy to invest in ETFs as they trade like stocks on a daily basis, but one thing to be aware of is that they come with fees as expressed in their expense ratios -- choose one with a ratio of less than 1%, and you'll ensure that fees won't eat into your profits down the road.

Tech stocks advance

Now let's consider the Vanguard S&P 500 ETF. Like the S&P 500, it trades near a record high right now as its leading components, tech companies such as Nvidia and Broadcom, have advanced in recent years. Though the fund includes 11 different industries, offering you great diversification, tech stocks are the most heavily weighted today -- of course, this could change in the future as the index and fund are regularly rebalanced to ensure they include the most significant companies of the times. This is positive as it means you'll always be invested in the strongest of companies.

But is right now a good time to get in on the Vanguard ETF? Here's what history says about buying at market highs: Whenever the market has peaked, declines have followed. For example, dot-com companies led the market higher in the late 1990s, but when the bubble burst, the S&P 500 went on to fall more than 40% over the next two and a half years. In more recent times, after the S&P 500 climbed from the coronavirus market crash to a new peak at the end of 2021, it then dropped nearly 20% in 2022.

Here's some positive news

So, history shows us that investing in the S&P 500 at a high will lead to declines -- but there's some positive news here too. This positive news is that these losses lead to recovery and gains, meaning that long-term investors always have scored a win by investing in the S&P 500.

^SPX data by YCharts

Now here's the tricky part: It's impossible to predict exactly when the peak and the decline will come. Today, the S&P 500 may have already reached its peak, and it might be set to fall further -- or it might rebound and reach additional highs in the months ahead.

What does this mean for investors? As long as you're willing to hold onto your investment for several years, you don't have to worry about timing the market and guessing which direction it will take next. Instead, you can buy the Vanguard S&P 500 ETF at any point in time -- even at a market high -- because history suggests you're likely to score a win over the long run.

Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Nvidia, Palantir Technologies, and Vanguard S&P 500 ETF. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.