Should investors keep buying index funds at all‑time highs? Felix Prehn, the founder of Goat Academy, examines the facts, the risks, and the built‑in protection that long‑term index investors often overlook.
Markets and valuations in plain terms
- The S&P 500 is near record levels.
- A key valuation measure, the Shiller P/E (price relative to average profits), sits around 40.
- Its long‑term average is about 16.
- Translation: stocks are priced far above normal. High prices do not guarantee a crash, but they often mean lower future returns.
What the past suggests
When valuations have been very high, 10‑year returns have tended to be modest. This does not mean returns must be low. It means expectations should be realistic. History shows that even after major declines, broad U.S. stock index returns over any 15‑year span have been positive. Time and patience matter.
The “Magnificent Seven” effect
A small group of large tech companies now makes up a big slice of the index. This concentration can boost results when those companies rise. It can also increase risk if they stumble. Concentration risk means too much of a portfolio depends on a few names.
Why dollar‑cost averaging still works
Dollar‑cost averaging (DCA) means investing a fixed amount on a regular schedule (for example, monthly).
- When prices are high, the same dollar amount buys fewer shares.
- When prices are low, it buys more shares.
- This simple math helps reduce the average cost over time without guessing market tops and bottoms. It is not market timing; it is a rules‑based process that naturally adjusts to prices.
Index funds vs. stock picking
Index funds offer broad exposure at low cost. They remove many emotional mistakes. Some skilled investors do pick stocks well, but it requires rules, discipline, and a strong stomach for ups and downs. Most people benefit from keeping a core allocation in index funds, then deciding if a smaller portion should be managed more actively.
Key terms explained
- Shiller P/E: a valuation metric that compares stock prices to the average of inflation‑adjusted profits over 10 years. Higher numbers mean stocks are expensive relative to earnings.
- Concentration risk: the risk that performance depends too much on a few stocks or sectors.
- Dollar‑cost averaging (DCA): investing the same amount on a fixed schedule, which buys more shares when prices drop and fewer when prices rise.
- Drawdown: the decline from a peak to a low point in a portfolio. A 30% drawdown means the portfolio fell 30% from its highest value.
How to decide what to do now
- Time horizon: Investors with 15+ years can usually keep buying on schedule. Shorter horizons may need more caution.
- Allocation: A balanced mix can reduce stress. For some, adding high‑quality bonds can help.
- Automation: Automate contributions so fear or headlines do not derail the plan.
- Diversification: A broad U.S. index offers strong coverage, but be aware of large‑cap tech concentration.
A practical checklist
- Review the plan and write it down.
- Match risk to the ability to handle a 30% decline.
- Keep DCA running through both rallies and drops.
- Use low‑fee index funds for the core.
- Revisit the plan on a regular schedule (for example, monthly or quarterly), not based on news.
A note on expectations
Jack Bogle, who pioneered index funds, framed long‑term returns as business growth plus dividends. If earnings grow near historical trends and dividends continue, long‑term compounding remains powerful—even if the next decade starts from high prices.
About the educator
Felix Prehn leads Goat Academy, an education community focused on clear, data‑driven investing. To learn more about the program and philosophy behind his teaching, visit the Goat Academy About page: Felix Prehn Goat Academy