With the Market Red Hot, Is Tracking the S&P 500 Still a Good Idea?

Buying and holding funds that track the S&P 500 is such conventional logic when it comes to investing that it's effectively become the default option for investors. Don't know what to invest in? Just track the S&P 500. And historically, it has done well and been a good way to benefit from the growth of the U.S. economy. While there have been crashes along the way, it has always recovered.

But is tracking the index still a good option with the S&P 500 at around record levels right now? This year, it's been rising in value after already performing exceptionally well over the past three years, where its gains have been well above its long-run average of 10%. Given how hot it has been of late, is tracking the broad index still a good idea in 2026?

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The big question to ask yourself

Every investor is different and will have different strategies for reaching their individual investment goals. Perhaps most important, however, is considering how many investing years you have before retirement, or how quickly you may need to access your money.

The key question to consider when investing in S&P 500 index funds is: how long do you plan to stay invested? If it's decades or at least 10-plus years, then going with an exchange-traded fund (ETF) such as the SPDR S&P 500 ETF Trust (NYSEMKT: SPY), which tracks the S&P 500, can be an excellent idea. But if you're looking to invest for just a year or two, or even five years, you may want to focus on low-volatility stocks that may be less vulnerable to the overall market. That's because while the S&P 500 has performed well over a long time frame, there are periods spanning years when it has declined and not been a great index for investors to track.

Tracking the index can still be a great move over the long term

The S&P 500 being at record highs isn't necessarily a reason to avoid index funds that track the index. As it grows over the years, it will continually hit new highs.

As long as you're not in a rush to sell your investments and won't need to access your money anytime soon, then it can be a good idea to invest in the SPY ETF, which tracks the index and charges a low expense ratio of only 0.09%. That can be precisely the type of investment to buy and hold, because even if the stock market crashes, you can be confident in knowing that it'll recover. And if you have many years to go before retirement, a buy-and-hold strategy can work just fine.

David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.