Key insights
- The article suggests that despite the S&P 500 nearing all-time highs and elevated valuations, a market correction presents a buying opportunity for long-term investors. It highlights the historical resilience and returns of the S&P 500, advocating for a 'fearful when others are greedy' approach. The piece also briefly mentions a specific technology company as a potential investment, but the primary focus is on the strategic advantage of buying ETFs during market dips.
With the S&P 500 hovering near all-time highs and its valuation at its highest level since the 2021 tech stock boom, investors need to be prepared for a correction.
Corrections, when the market drops at least 10%, are not necessarily a bad thing for long-term investors; they are just temporary drops that occur regularly and for a variety of reasons. They could be related to economic forces, like slow growth or high inflation, but they could also be a pullback due to an overheated market.
If you invest for the long term, you don't panic-sell when the market corrects, because over time, the S&P 500 has consistently produced double-digit returns. Over the past 10 years, for example, it has had an average annualized total return of 15%, and over the past 20 years, it has averaged 11%.
Additionally, corrections are a fantastic time to buy great stocks and exchange-traded funds (ETFs) at a discount. Warren Buffett, the former CEO of Berkshire Hathaway, famously advised investors to be "fearful when others are greedy, and greedy when others are fearful."
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Given the meteoric run the market has been on over the past two months, this is definitely not the time to be greedy.
The S&P 500 has risen 16.4% since March 30 and reached an all-time high in early June of 7,620. It has dropped about 3% over the past few days, but the index was still sitting at around 7,385 as of June 5.
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Certainly, every portfolio should have an S&P 500 ETF as a core holding, because of its track record and the exposure it provides to the largest stocks in the U.S. across sectors. All of the major shops have their own S&P 500 index funds, including the State Street SPDR Portfolio S&P 500 ETF (SPYM +0.24%), which is essentially the retail version of the oldest ETF, the SPDR S&P 500 ETF (SPY +0.25%).
The SPYM ETF has the lowest expense ratio of the major S&P 500 ETFs at 0.02%. That means investors pay just $0.20 in fees for every $1,000 invested in the fund.
Currently, the P/E of the S&P 500 is around 27, which is above the historical average but down from 29 in January.
However, the Shiller cyclically adjusted P/E (CAPE) ratio, which looks at earnings over the past 10 years on an inflation-adjusted basis, is at 42. That is the highest since the dot-com boom in 1999. Many experts believe the Shiller CAPE ratio is the most accurate valuation metric because it takes a longer view and accounts for inflation. So, a Shiller CAPE of 42 should be concerning.
Should investors pile into S&P 500 index ETFs like SPYM now? Probably not. Certainly hold your allocations, but there might be a better time to get greedy when valuations fall a bit more. At that point, adding shares of SPYM will be a no-brainer.