History Says the S&P 500 Is Expensive: Should You Still Buy VOO?
Key Points
The cyclically adjusted price-to-earnings ratio is at a level not seen since the dot-com era.
Dollar-cost averaging into stocks is the best long-term approach for investors.
- 10 stocks we like better than Vanguard S&P 500 ETF ›
The stock market is proving that it's one of the best means of building wealth. The S&P 500 index has generated a total return of 305% in the past 10 years (as of July 28). On a per-year basis, this is a 15% gain.
But history says that the widely followed benchmark is expensive. Should investors still consider buying the Vanguard S&P 500 ETF (NYSEMKT: VOO) right now?
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As of this writing, the cyclically adjusted price-to-earnings (CAPE) ratio, a popular valuation metric that looks at 10-year inflation-adjusted profits, is just shy of 40.5. Outside of the dot-com bubble period at the turn of the century, this figure has never been this high.
According to research from Invesco that looked at data since 1983, a starting CAPE ratio over 40 implies negative annualized returns in the coming decade.
The idea that it's a terrible time to allocate savings to the stock market is understandable. However, the Vanguard S&P 500 ETF has performed exceptionally well in the past 10 years, even though there have always been concerns about the market's valuation. Had you decided to sit out, you'd have missed out on fantastic gains.
Investors should continue to dollar-cost average into this ETF. Ignore the noise and stay focused on the long term.
Should you buy stock in Vanguard S&P 500 ETF right now?
Before you buy stock in Vanguard S&P 500 ETF, consider this:
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Neil Patel has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
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