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I’m a fan of index funds. My retirement portfolio has both US and global index tracker products. But is it wise to put more money into these funds while the S&P 500 index is near all-time highs? Let’s talk.
averaging
Experts often recommend drip-feeding funds into index funds on a regular basis (for example, monthly). And generally speaking, I think this is a smart strategy.
By putting money into the market at regular intervals, investors can average out their entry points over time. Some purchases are at lower levels, while others are higher.
Disadvantages of buying expensive
That being said, I’m always a little nervous about putting cash into index funds after a really strong stock market. That’s because your starting point can have a huge impact on your overall returns in subsequent years.
Looking at the S&P 500 index today, I wouldn’t be surprised if the returns were a bit disappointing in the short to medium term. Not only is the index up about 33% compared to last year, but valuations are also very high. Currently, the average price-to-earnings (P/E) ratio for the entire S&P 500 index is approximately 24 times. Meanwhile, the average P/E ratio of the top 10 stocks in the index is even higher.
It’s worth noting that JPMorgan analysts said last month that the S&P 500’s average calendar-year return could shrink to less than 6% over the next decade due to its recent strong performance. Their argument is primarily based on valuations, and current stock market valuations are higher than they have been historically.
Seeking value
This doesn’t mean I won’t invest in the short term. That means I focus on different investments.
What I often do when the market is strong is reduce my contributions to index funds and focus on stocks and areas of the market that have value. This way, you can put your money into assets that you think have higher return potential.
I bought this stock
One of the stocks I’ve been buying recently for my retirement portfolio is Alphabet (NASDAQ: GOOG). He owns Google, YouTube, and self-driving car company Waymo.
The stock recently dropped from $190 to $150, so I added a few more shares to my portfolio at a price of $154. In my opinion, the stock had some value.
Wall Street expects Alphabet to generate earnings of $8.71 per share next year. So I bought the stock when it was trading at a forward P/E of just 17.7x. This is below the market average and I think it’s an attractive price for this legendary tech stock.
story continues
Of course, there is no guarantee that this move will be successful. Investing in individual stocks is riskier than investing in index funds. In this case, one of the risks to consider is regulatory oversight. Another thing is that Google search is being interfered with by ChatGPT.
However, I have bought this stock on dips many times in the past. And it’s always paying off as the company continues to grow. Therefore, I am optimistic that recent purchases will generate attractive returns in the coming years.
Should you put your money into index funds in October, when the S&P 500 index is nearing record highs?The post appeared first on The Motley Fool UK.
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Ed Sheldon holds a position at Alphabet. The Motley Fool recommends Alphabet. Alphabet executive Suzanne Frey is a member of The Motley Fool’s board of directors. The views expressed on the companies mentioned in this article are those of the author and may differ from official recommendations we make on subscription services such as Share. Advisor, hidden winner, professional. At The Motley Fool, we believe that considering diverse insights makes us better investors.
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