3 Things You Need to Know If You Buy the Vanguard S&P 500 ETF Today
The Vanguard S&P 500 ETF (NYSEMKT: VOO) is not only a massive exchange-traded fund (ETF) -- it's one of the largest investment vehicles in the entire market. Many investors consider the ETF to be the backbone of their portfolio, and for good reason. The S&P 500 has historically delivered excellent results over long periods, and is generally a worry-free way to invest over the long run.
However, with the S&P 500 near an all-time high, many investors are wondering if now is the right time to invest. Here's what you need to know, and three important things to keep in mind before you buy shares of the ETF.
1. An all-time high isn't necessarily a bad time to invest
It's common knowledge that one of the main goals of investing is to "buy low and sell high," and with the S&P 500 close to its all-time high, it might feel like you're doing the exact opposite by buying the Vanguard S&P 500 ETF today. But that's not really the case if you're a long-term investor. In fact, history tells us that it's rarely a bad time to invest.
Consider this example of unfortunate timing. Let's say that you bought shares of an S&P 500 index fund in October 2007 -- the worst possible time before the financial crisis caused the index to plunge by 50%. If you had bought at this peak and simply held on to your investment through the years, you'd be sitting on a 385% gain today. And as you can see in the chart, the massive crash of 2008 looks rather small when we zoom out.
^SPXTR
Of course, it would be ideal if we could all simply invest in the S&P 500 when the market is down. But it's impossible to time the market. Just because the S&P 500 recently reached an all-time high doesn't mean it can't continue to climb much higher. A lot of smart investors thought the market had peaked in the 2014-2015 time frame, only to see the bull market last for another five-plus years.
2. The S&P 500 is a weighted index
Here's an important concept all investors should know before adding shares of the Vanguard S&P 500 ETF, or many other ETFs for that matter, to their portfolios.
The S&P 500 is considered to be a diverse way to invest, and it is, in the sense that you'll get exposure to 500 different stocks with a single investment vehicle. But not all of those stocks are counted equally, as the S&P 500 is weighted by market cap, meaning that larger companies make up a larger proportion of the index (and of your S&P 500 index funds).
Specifically, here are the largest holdings of the Vanguard S&P 500 ETF and their respective weightings as of May 31:
Data source: Vanguard.
In fact, the 10 largest components of the S&P 500 represent just 2% of the number of companies in the index. But they make up 34% of the index's performance.
3. Averaging in could be the way to go
As mentioned, it's not necessarily a bad idea to buy shares of the Vanguard S&P 500 ETF when the index is near an all-time high. But regardless of what the S&P 500 is doing, averaging into a position could be the smartest approach.
In simple terms, averaging into a position (also known as dollar-cost averaging) refers to buying equal dollar amounts worth of shares at specific intervals, rather than investing all at once. For example, you can average into a position in the Vanguard S&P 500 ETF by investing $100 on the first of every month.
This ensures that you'll buy more shares when the ETF is cheaper, and fewer shares in months when the index is relatively high. By doing so, you'll avoid investing all of your money at peaks and will get a mathematically favorable average price over time.
The bottom line is that from a long-term perspective, there's no such thing as a bad time to invest in the S&P 500. However, it's important to know how the index works before investing and understand that building a position incrementally over time can be a smart strategy to remove any timing concerns for long-term investors.
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