Should You Be Buying Stocks if the S&P 500 Hits a New All-Time High in July?

Here's why investors should continue buying stocks even though the major indexes are hitting new highs, but why in quality companies is especially important when valuations are elevated

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Get comfortable buying high Buying a higher price goes against every instinct ingrained in us as consumers

Buyers benefit when clothing goes on sale, cars can be purchased below sticker price, or when housing prices or land values fall

Most goods are stagnant assets

There's very little chance that a pair of jeans you buy today will be worth more a few years from now

And cars fall in value the second they are driven off the lot

House prices and land values in growing urban areas have historically increased over time, but it's not because the land is magically better than it used to be

Rather, it's all supply and demand

They represent partial ownership of a company

No matter how small, a slice of a big pie can be powerful if the company compounds in value

And yet, investors still often make the mistake of assuming a stock is a good buy because the price is lower, or that a stock is not a good buy or is worth selling because the price has gone up

Its model has remained essentially the same for decades

However, what has changed is a massive shift away from cash payments toward debit and credit cards and digital payments

The company makes money when its cards are tapped, swiped, or entered digitally

It earns revenue based on the volume and frequency of transactions with its cards

And yet it doesn't bear the credit risk of its customers

Instead, it partners with financial institutions to bear that risk

The larger and more secure Visa's network becomes, the more merchants may be willing to absorb Visa's fees so they don't hurt their sales

At the same time, consumers are incentivized to use their cards for as many purchases as possible, given the purchase tection offered by many financial institutions and credit card rewards grams

It's a simple and relatively easy-to-understand model that has made patient investors rich

And because Visa's expenses are manageable, it can afford to pass along fits to holders by repurchasing stock and paying a growing dividend

Just because Visa's stock price has compounded several-fold over the long term doesn't mean the stock is a bad buy now

Visa commands a premium valuation with a price-to-earnings (P/E) ratio of 35 compared to its 10-year median P/E of 33

But its forward P/E is 30. 7, suggesting analysts believe that Visa has the qualities necessary to grow into that valuation over time

Be selective Visa is just one of many companies hovering within striking distance of all-time highs that could still be worth buying now

The stock isn't as good a deal as it was a couple of months ago, but it could still be a solid long-term investment

When the broader market is undergoing a rapid sell-off, many phenomenal companies can fall to bargain-bin valuations

But when the major indexes are making new highs, it is even more important for investors to be selective and only put their hard-earned savings into companies they are highly committed to

In sum, folks shouldn't stop just because stocks have gone up, but rather, understand the effect of valuation changes on their existing holdings and how price increases could impact the risk and potential reward of stocks on their watch lists

Daniel Foelber has no position in any of the stocks mentioned

The Motley Fool has positions in and recommends Visa

The Motley Fool has a disclosure policy.