Back in 2023, the S&P 500 managed to advance by 24.2 percent, thanks in large part to a few signs that the economy was making a bounce back giving investors a bit more confidence that we were headed for a soft landing. For those who might not know, a “soft landing” is when the Federal Reserve successfully gets inflation under control without it leading to a recession. And it looks like the momentum is set to continue for 2024.
According to a new report from The Motley Fool, the S&P 500 has advanced another 10.2 percent during the first three month period of the year, which ended in March, which marks the second strongest first-quarter performance of the last 10 years. And that’s not all. The index has already hit 22 record highs in 2024, according to Goldman Sachs, who revealed that is now very close to hitting another one.
With that being said, the Motley Fool revealed there are two critical mistakes that investors can make in light of this good news.
The first one would be totally avoiding the stock market or selling stocks without there being a good reason to do so.
Isaac Newton once said, “What goes up, must come down.” That axiomatic statement is irrefutable where gravity is concerned, but investors should never apply that logic to the financial world. The stock market is not obligated to decline after moving higher.
In fact, investing in the S&P 500 at its peak has historically been a smart decision. Strategists at JPMorgan Chase recently wrote, “Over the last 50-odd years (going back to 1970), if you invested in the S&P 500 at an all-time high, your investment would have been higher a year later 70% of the time, with an average return of 9.4% — versus the 9% on average when investing at any time.”
With that in mind, the worst mistake investors can make right now is avoiding the stock market or selling stocks simply because they are worried about a possible correction. To quote famous investor Peter Lynch, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”
In Trevor Jennewine’s report from the Motley Fool, he goes on to make it clear that he’s not saying for sure the stock market will go up over the course of the upcoming months. His point was that investors need not fear market peaks. He then went on to note that investors who are patient have, historically speaking, done very well in such scenarios.
“The S&P 500 returned 572% over the last two decades, compounding at 10% annually, despite suffering three bear markets and seven corrections,” Jennewine said.
The second mistake Jennewine discusses in his piece is the dreaded fear of missing out and how disastrous it can be to give in to this form of anxiety.
There is a second mistake, no less dangerous than the first, that investors must avoid: falling prey to fear of missing out (FOMO). Even the most levelheaded investors can be tempted to ignore fundamentals and chase momentum when the stock market is soaring, but purchasing stocks without concern for price will eventually backfire.
The frenetic enthusiasm surrounding artificial intelligence (AI) is an excellent example. I believe AI will change the world in the coming decades, perhaps more so than any technology in human history. In fact, just as you and I take mobile phones and the internet for granted, I bet people in the future will consider self-driving cars and autonomous robots commonplace. But that does not 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 putting their money to work in the market. Warren Buffett commented on that topic in his 1982 letter to Berkshire Hathaway shareholders,” the author stated.
“A too-high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favorable business developments,” Buffet went on to say.
In summary, investors should always consider valuation when they are looking to purchase stocks, and they should never buy a stock that they aren’t already prepared to hold when and if a market downturn occurs.