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The 2 worst mistakes investors can make right now

The S&P500 (SNPINDEX: ^GSPC) In 2023, yields rose 24.2% as signs of economic resilience gave investors increasing confidence in a soft landing, a scenario in which the Federal Reserve successfully controls inflation without triggering a recession.

That momentum has carried into 2024. The S&P 500 advanced another 10.2% during the three-month period ending in March, the second-strongest performance in the first quarter of the past decade. Even more impressive, the index has already reached 22 record highs this year Goldman Sachsand it is within striking distance of another.

These are the two worst mistakes investors can make right now.

Mistake 1: Avoiding the stock market or selling stocks for no 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 that logic to the financial world. The stock market is not bound to fall after going higher.

In fact, investing in the S&P 500 at its peak has historically been a smart decision. Strategists at JPMorgan Chase recently wrote: “If you had invested in the S&P 500 at an all-time high over the past fifty years (going back to 1970), your investment a year later would have been higher 70% of the time, with an average return of 9.4% – compared to the average 9% when investing at any time.”

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With that in mind, the biggest mistake investors can make right now is avoiding the stock market or selling stocks simply because they’re worried about a possible correction. To quote famed investor Peter Lynch, “Far more money has been lost by investors preparing for, or trying to anticipate, corrections than was lost in the corrections themselves.”

To be clear, I’m not saying the stock market will definitively rise in the coming months. I’m just pointing out that market peaks are nothing to fear. More importantly, patient investors have historically done quite well. The S&P 500 has returned 572% over the past twenty years, for an annual increase of 10%, despite three bear markets and seven corrections.

Mistake 2: Falling prey to the fear of missing out

There is a second mistake, no less dangerous than the first, that investors should avoid: falling prey to the fear of missing out (FOMO). Even the most level-headed investors may be tempted to ignore fundamentals and chase momentum when the stock market rises, but buying stocks without worrying about price will ultimately backfire.

The frenetic enthusiasm surrounding artificial intelligence (AI) is a prime example. I believe AI will change the world in the coming decades, perhaps more than any 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.

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More importantly, even the best AI stocks aren’t worth buying at any price. Investors should always consider valuation when putting their money to work in the market. Warren Buffett commented on this topic in his 1982 letter to Berkshire Hathaway shareholders. “A too high purchase price for the stock of an excellent company could undo the effects of another decade of favorable business developments,” he wrote.

With that in mind, the S&P 500 currently trades at 20.5 times forward earnings, a significant premium to the 10-year average of 17.7 times forward earnings, according to FactSet Research. That means many stocks are trading at historically high valuations, so investors should be especially cautious in the current market environment. To quote Buffett, “Be afraid when others are greedy.”

Here’s the bottom line: The two biggest mistakes investors can make right now are (1) avoiding the stock market or selling stocks for no 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 even the best stocks aren’t worth buying at any price. Investors should always consider valuation when purchasing stocks, and they should never buy a stock that they are not willing to hold during a market downturn.

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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Trevor Jennevine has no positions in any of the stocks mentioned. The Motley Fool holds positions in and recommends Berkshire Hathaway, Goldman Sachs Group, and JPMorgan Chase. The Motley Fool has a disclosure policy.

The S&P 500 Nears All-Time High: The Two Worst Mistakes Investors Can Make Right Now was originally published by The Motley Fool

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