Ask Matt: Is buying stocks at the high a bad idea?

Q: Is buying stocks at the high a bad idea?

A: With the Standard & Poor’s 500 hitting new highs, it’s natural for investors to think they’d be buying at the top if they jumped in now.

Just because stocks are at highs doesn’t mean they can’t go higher. It doesn’t mean they can’t go lower, either. It’s not the absolute value of the market that matters, but rather, the market’s valuation.

There is a reason to be cautious looking at the market this way. The S&P 500 is currently trading for 21.3 times adjusted earnings over the past 12 months, says S&P Dow Jones Indices. That’s higher than the market’s average 19 times trailing valuation since 1988. Trying to time the market, though, has been a futile exercise for most investors. The stock market’s value is determined through a live auction of other investors using real money to set prices based on known information. If profit growth reaccelerates, stocks could look less expensive. Analysts expect companies in the S&P 500 to earn an adjusted $120.81 a share over the next 12 months. If those earnings materialize, the market would be trading for just 17.7 times, which is cheaper than average. Confused? That’s why you shouldn’t time the market, but choose a portfolio that matches your taste for risk.

Paste BN markets reporter Matt Krantz answers a different reader question every weekday. To submit a question, e-mail Matt at mkrantz@usatoday.com or on Twitter @mattkrantz.