S&P 500 Near All-Time High: The Two Worst Mistakes Investors Can Make Right Now

S&P 500 Index (SNPINDEX: ^GSPC)In 2023, it rises by 24.2%, as signs of economic recovery make investors increasingly confident of a soft landing.

This trend has spread to 2024. The S&P 500 gained another 10.2% in the three months through March, the second-best first quarter of the past decade. Even more impressive, according toGoldman SachsThe index has already hit 22 all-time highs this year, and is within striking distance of another.

Here are two of the most serious mistakes investors can make today.

Mistake 1: Avoiding the Stock Market or Selling Stocks for No Good Reason

Isaac Newton once said, "What goes up must come down". This axiom is irrefutable in the case of gravity, but investors should never apply this logic to the financial world. The stock market has no obligation to go down after going up.

In fact, investing in the S&P 500 at its peak has always been a wise decision.JP Morgan Chase (bank)(JPMorgan ChaseThe strategists at the S&P 500 recently wrote, "Over the past 50+ years (dating back to 1970), if you invested when the S&P 500 was at an all-time high, you would have been investing at a higher level 70% of the time one year later, with an average rate of return of 9.4% - compared to 9% at any time. The average rate of return is 9.4% - while the average rate of return for investing at any time is 9%.

As a result, the worst mistake an investor can make today is to avoid the stock market, or to sell stocks simply for fear of a possible correction. To quote the famous investor Peter Lynch, "Investors lose far more money preparing for, or trying to anticipate, a correction than they do in a correction.

To be clear, I am not saying that the stock market will definitely rise in the next few months. I'm just pointing out that market spikes are nothing to be afraid of. More importantly, patient investors have historically done well. Over the past two decades, the S&P 500 has returned 5,721 TP3T, with a compound annual growth rate of 101 TP3T, despite three bear markets and seven corrections.

Mistake 2: Fear of Missing an Opportunity

The second mistake investors must avoid is no less dangerous than the first: Fear of Missing Out (FOMO). When the stock market is on the rise, even the most level-headed investor can be tempted to ignore the fundamentals and chase the trend, but buying stocks at any price will ultimately backfire.

The frenzy around Artificial Intelligence (AI) is a good example. I believe that AI will change the world in the next few decades, perhaps more than any other technology in human history. In fact, just as you and I take cell phones and the Internet for granted, I'd wager that in the future, people will take self-driving cars and autonomous robots for granted. But that doesn't mean every AI stock is worth investing in.

What's more, even the best AI stocks are not worth buying at any price. Investors must always consider valuation when putting money into the market. Warren Buffett wrote in 1982 toBerkshire Hathaway) shareholders' letter addressed this issue." He wrote, "An overpriced purchase price for the stock of a good company may resist the effects of a favorable business development in the following decade.

With that in mind, according to FactSet Research, 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. This means that many stocks are trading at historically high valuations, so investors should be extremely cautious in this market environment. To paraphrase Warren Buffett, "Fear when others are greedy".

Here's the bottom line: The two worst mistakes investors can make right now are (1) avoiding the stock market or selling stocks for no reason, and (2) getting sleepy for fear of missing out. Historically, the S&P 500 has performed relatively well after hitting record highs, but even the best stocks are not worth buying at any price. Investors should always consider valuation when buying stocks and should never buy stocks they are not prepared to hold in a downturn.

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JPMorgan Chase is an advertising carrier partner of The Ascent, a Motley Fool company. Trevor Jennewine does not hold any of the above shares. The Motley Fool holds shares of recommended resonance resonance resonance resonance resonance resonance resonance resonance resonance resonance resonance resonance resonance resonance resonance resonance resonance resonance resonance resonance resonance resonance resonance resonance resonance resonance Hathaway, Goldman Sachs Group, and JPMorgan Chase. The Motley Fool has a disclosure policy.

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