The S&P 500 (SNPINDEX: ^GSPC) rose 24.2% in 2023 as signs of economic resilience made investors increasingly confident about a soft landing, a scenario in which the Federal Reserve successfully controls inflation without triggering a recession.
This dynamic has played out into 2024. The S&P 500 gained another 10.2% in the three-month period ending in March, the second-strongest first-quarter performance in the last decade. What’s even more impressive is that the index has already reached 22 record highs this year Goldman Sachsand it is within striking distance of another.
Here are the two worst mistakes investors can make right now.
Mistake 1: Avoiding the IPO or selling shares without a good reason
Isaac Newton once said, “What goes up must come down.” This axiomatic statement is irrefutable when it comes to gravity, but investors should never apply this logic to the world of finance. The stock market is not bound to fall after rising.
In fact, investing at the peak of the S&P 500 has historically been a wise decision. strategists JPMorgan Chase recently wrote: “If you had invested in the S&P 500 at an all-time high over the last 50 years (since 1970), your investment would have been higher one year later on average 70% of the time.” Return of 9.4% – in comparison at an average of 9% if invested at any time.”
With this in mind, the worst mistake investors can make right now is avoiding the stock market or selling stocks just because they are afraid of a possible correction. To quote famous investor Peter Lynch: “Investors who prepared for corrections or tried to anticipate corrections have lost far more money than from corrections themselves.”
To be clear, I’m not saying the stock market will definitely rise in the coming months. I just want to point out that market spikes are nothing to be afraid of. More importantly, patient investors have historically done quite well. The S&P 500 has returned 572% over the past two decades, equivalent to 10% annual compounding, despite suffering three bear markets and seven corrections.
Mistake 2: Falling into the fear of missing out
There is a second mistake, no less dangerous than the first, that investors must avoid: falling victim to fear of missing out (FOMO). Even the most level-headed investors can be tempted to ignore fundamentals and chase momentum when the stock market is booming, but buying stocks without regard to price will ultimately backfire.
The frenetic enthusiasm surrounding artificial intelligence (AI) is a prime example. I believe that AI will change the world in the coming decades, perhaps more than any other technology in human history. Just as you and I take cell phones and the Internet for granted, I bet that in the future people will take self-driving cars and autonomous robots as commonplace. But that doesn’t mean every AI stock is a worthwhile investment.
More importantly, not even the best AI stock is worth buying at any price. Investors must always consider valuation when deploying their money in the market. Warren Buffett commented on this issue in his 1982 letter Berkshire Hathaway Shareholders. “A purchase price that is too high for the shares of a great company can negate the impact of a subsequent decade of favorable business developments,” he wrote.
With that in mind, the S&P 500 is currently trading at 20.5 times forward earnings, which represents a significant premium to the 10-year average of 17.7 times forward earnings, according to FactSet Research. This means that many stocks are trading at historically high valuations, so investors should be particularly cautious in the current market environment. To quote Buffett: “Be fearful when others are greedy.”
Here’s the bottom line: The two worst mistakes investors can make right now are (1) avoiding the IPO or selling stocks without a good reason and (2) falling prey to the fear of missing out. The S&P 500 has historically performed quite well from record highs, but not even the best stock is worth buying at any price. Investors should always consider valuation when purchasing stocks and never purchase a stock that they are not prepared to hold during a market downturn.
Should you invest $1,000 in the S&P 500 Index now?
Before you buy stocks in the S&P 500 Index, consider the following:
The Motley Fool Stock Advisor The analyst team has just identified what they think this is The 10 best stocks for investors to buy now… and the S&P 500 Index wasn’t one of them. The ten stocks that made the cut could deliver huge returns in the years to come.
Think about when Nvidia created this list on April 15, 2005… if you have $1,000 invested at the time of our recommendation, You would have $540,321!*
Stock Advisor provides investors with an easy-to-follow roadmap to success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks per month. The Stock Advisor has service more than quadrupled the return of the S&P 500 since 2002*.
See the 10 stocks »
*Stock Advisor returns from April 8, 2024
JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, Goldman Sachs Group and JPMorgan Chase. The Motley Fool has a disclosure policy.
The S&P 500 Is Near Its Record High: The 2 Worst Mistakes Investors Can Make Right Now was originally published by The Motley Fool