The Two Worst Mistakes Investors Can Make Right Now

The three major U.S. stock indexes have produced positive returns year-to-date, but the market has gone through a rough patch in recent weeks. Fears of a recession resurfaced as weak employment data raised questions about whether the Federal Reserve waited too long to cut interest rates. The resumption of US presidential elections and broader geopolitical tensions have increased economic uncertainty.

In turn, the S&P 500 (SNPINDEX: ^GSPC) had its worst July in the last decade and the index recently suffered its biggest single-day drop in two years. Meanwhile, the Nasdaq Composite (NASDAQINDEX: ^IXIC) plunged as investors turned away from technology stocks, and the index entered correction territory when it closed more than 10% from its all-time high on Aug. 2.

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

Mistake 1: Avoiding stocks until the S&P 500 and Nasdaq Composite recover

It may seem prudent to wait patiently until the S&P 500 and the recovery of the Nasdaq Composite, but avoiding the stock market is one of the worst mistakes investors can make right now. Warren Buffett once told CNBC, “The best chance to raise capital is when things are getting worse.”

The Nasdaq has fallen into correction territory seven times in the last decade. But overall, the index recovered quickly, so investors who avoid the stock market could easily miss the recovery. The chart below provides details.

Data source: YCharts.

As shown above, over the past decade, the Nasdaq has returned an average of 19% and a median of 15% during the 12-month periods following its first close in correction territory. We can apply this information to the current situation to make an educated guess about the future.

Specifically, the current market correction became official when the Nasdaq closed at 16,776 on August 2, 2024. The index currently trades at 16,780, implying an upside of 19% (average) and 15% (median ) until August. 2, 2025.

Likewise, the S&P 500 is currently 5% below its all-time high and Goldman Sachs Analysts see this as a buying opportunity, saying: “We have found that 5% pullbacks have historically been good entry points, as the index has gone on to provide an average return of 6% over the subsequent three months, with positive returns at 84% of the episodes.”

The story continues

Past performance is never a guarantee of future returns; Both indices could fall further if the economy continues to tilt towards a recession. However, it would be foolish to avoid the market at this time. Even if the S&P 500 and Nasdaq fail to post dramatic recoveries in the short term, history says both indexes will rise in the long term. In this context, the current reduction is a buying opportunity for patient investors.

Mistake 2: Buying stocks at a low price without worrying about the valuation

Buying stocks indiscriminately is one of the worst mistakes investors can make. Not every dip is a buying opportunity and no stock is worth buying at any price. Warren Buffett once wrote, “For the investor, too high a purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favorable business developments.”

This mistake is easy to make with popular stocks. For example, Litter (NASDAQ:AAPL) is down 8% from its 52-week high, but shares trade at 33 times earnings. This valuation seems expensive because Wall Street predicts 12% earnings growth through 2026. It is certain that the next release of Apple Intelligence It could trigger a huge iPhone upgrade cycle, but I would avoid the stock until it trades at a more reasonable valuation.

Similarly, Palantir Technologies (NYSE:PLTR) is down 2% from its 52-week high, but shares trade at 90 times adjusted earnings. That valuation seems outrageously expensive because Wall Street expects earnings to grow 21% annually through 2026.

To be fair, Palantir should benefit as companies spend more on data analytics and artificial intelligence (AI), and the company reported encouraging financial results in the most recent quarter. But I plan to keep this stock on my watch list until the price drops.

Lastly, Microsoft (NASDAQ:MSFT) is down 13% from its 52-week high, but shares trade at 34.4 times earnings. That valuation seems expensive because Wall Street expects earnings to grow 14% annually through 2026.

Microsoft has emerged as an early leader in generative AI and is ideally positioned to monetize the technology, given its status as the world’s largest software company. Still, I would avoid Microsoft until the stock is more reasonably priced.

Should you invest $1,000 in the S&P 500 index now?

Before buying stocks in the S&P 500 index, consider the following:

THE Motley Fool Stock Advisor the team of analysts has just identified what they believe to be the 10 best stocks for investors to buy now… and the S&P 500 index was not one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia I made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you would have $668,029!*

Stock advisor provides investors with an easy-to-follow plan for success, including guidance on building a portfolio, regular analyst updates, and two new stock picks each month. THE Stock advisor service has more than quadrupled the return of the S&P 500 since 2002*.

See the 10 actions »

*Stock Advisor returns on August 12, 2024

Trevor Jennewine holds positions at Palantir Technologies. The Motley Fool holds positions and recommends Apple, Goldman Sachs Group, Microsoft and Palantir Technologies. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The motley fool has a disclosure policy.

Stock Market Selloff: The Two Worst Mistakes Investors Can Make Right Now was originally published by The Motley Fool