Within my retirement portfolio, I own a range of global and US index funds. I think these products are a great way to get diversified exposure to the stock market at a low cost, and I contribute to them regularly. But is it smart to put money into these funds while the S&P 500 index is near all-time highs? Let’s discuss.
Averaging in versus taking an active approach
A lot of financial experts recommend putting a certain amount of money into index funds every month, no matter what’s happening in the markets. And for someone who wants to take a hands-off approach to investing, I think that’s a pretty sound strategy.
However personally, I like to be a little more active in my approach. Because when it comes to buying the whole market, I’m not the biggest fan of ‘buying high’.
What I tend to do is invest in index funds aggressively whenever there’s a decent pullback in the market. For example, when markets tanked in April, I was loading up on them.
Then, when markets rise to a high level, I rein in my index fund buying and focus more on undervalued individual stocks. My logic is that I’m likely to get better returns from the stocks than the market as a whole in the years ahead.
Better returns from stocks?
Here’s an example of this in practice. This time last year, the S&P 500 had just had a great run (it was up 30% in a year) and was at all-time highs.
This spooked me a little, so instead of putting money into my index funds, I bought shares in Google owner Alphabet instead. It was out of favour at the time due to concerns about AI disruption and trading near $150.
Fast forward to today, and the S&P is actually about 16% higher than it was this time last year. Which shows that a market at high levels can keep going higher (it did have a major pullback in April).
But here’s the thing. Over the last year, my Alphabet shares have risen from $150 to $250 – a gain of nearly 70%.
So, focusing on individual stocks instead of buying the market paid off. Over the last year, Alphabet has returned more than four times the market.
An opportunity today
Looking at the market today, I reckon a more active approach could work for me again. Because while the S&P 500 could keep rising in the years ahead, I think there will be plenty of stocks that provide higher returns.
One stock I’ve been buying recently is London Stock Exchange Group (LSE: LSEG). The set-up here is actually quite similar to Alphabet this time last year in that right now, there’s concern that AI is going to disrupt the business.
As a result of these concerns, the stock has fallen from above £120 to around £82 in the blink of an eye. That represents a fall of around 30%.
At today’s levels, I see the potential for market-beating returns over the next year or two. At present, the stock is trading on a forward-looking price-to-earnings (P/E) ratio of 18, which is low for a world-class financial data company.
AI disruption is a risk, of course. However, weighing up the risks versus the valuation, I think the stock is worth considering.
