The S&P 500 Is Off Its High, And You Should Buy

S&P 500 - The S&P 500 Is Off Its High, And You Should Buy

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This week marks a full year since U.S. stock indices hit their all-time highs. I expect the media to make a big deal about the lack of new highs over the past 12 months.

But should investors be concerned? Absolutely not.

First, while the S&P 500’s price level last hit a high on May 21, 2015, on a total return basis the index hit an all-time high just last month — on April 20, to be specific.

But the media and most investors don’t focus on total returns. They focus on the indices and yes, we’ve gone that full year without a record. Is this unusual? Not at all. In fact, drawdowns are normal when investing in stocks.

Allow me to paint a picture.

The accompanying chart shows the growth in price of the S&P 500 Index since its March 1957 start date. The shaded regions show when the index was below its previous high point to varying degrees. Despite all the color on the chart, over the nearly 60-year-long stretch, the S&P 500 grew at a 6.7% annual pace — for a price return of 4,585%.

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On just 6% of trading days was the index actually making a new high. And 36% of the time, the index was within 5% of an all-time high. Flipping that around, it means that 57%, or more than half of the time, the S&P 500 Index was off its high by 5% or more.

Think about that. Even though a long-term investment in the stock market has paid off nicely, more than 90% of the time an investor would have been feeling some level of regret.

One other stat: The S&P 500 Index (on a price-only basis) has actually spent three times as many days at levels 20% or more below its highs as it has hitting a new high. (It was 20% or more below its high 20% of the time, compared to hitting a new high on just 6% of all trading days.)

We’ve all heard the disclaimer that you can’t invest directly in the index, and dividends do very much matter to flesh-and-blood investors, so let’s briefly look at a real-world, investable example.

This next chart shows the growth of the Vanguard 500 Index Fund (MUTF:VFINX), including dividends, since the end of June 1983. (There’s nothing special about that date, it’s just as far back as my daily total return data goes.) Over the past 33 years or so Vanguard 500 Index grew at a 10.4% annual pace — for a total return of 2,519%.

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Including dividends in return calculations always paints a more realistic picture, but in this case it doesn’t change the image much. As you can see in the table below, when I include dividends, the index fund spends more time at or near highs and less time materially below those highs.

But still, an investor in Vanguard 500 Index would have spent most days below a previous high point. (I also ran the analysis on the S&P 500 price index since June 1983 for reference — you can see how including dividends boosted returns and cut back on drawdowns over time.)

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Whether you look at price return or total return, U.S. large-cap stocks have been treading water for the last year, with some periods, like the early part of this year, giving investors a fright. But, if you are investing in the stock market, you need to accept that you will be below your most recent high point with great regularity.

To my way of thinking, pullbacks and corrections just create opportunities to put money to work.

With the market off its highs, this is an excellent time to add to accounts. I’d rather buy below the highs than at the highs.

Editor/Research Director Jeffrey DeMaso helps publish The Independent Adviser for Vanguard Investors, a monthly newsletter that keeps abreast of recent developments at Vanguard, and the annual FFSA Indepedent Guide to the Vanguard Funds.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/05/sp-500-vfinx-buy/.

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