You've Been Warned: Don't Make These Critical Mistakes With The Stock Market At All-Time Highs

At the time of this writing, the benchmark S&P 500 index has recorded a stunning 24 all-time highs so far in 2024. In part, this is due to expectations that the Federal Reserve will begin lowering interest rates this year, which will facilitate consumer activity, among other positives. Interest rates have been evaluated since 2022 in a bid to stem inflation resulting from COVID-19-era stimulus spending and supply chain bottlenecks.

Equally as promising as lower interest rates is the future role of artificial intelligence in driving economic growth. AI stocks have surged in 2024 and perhaps none is more significant than Nvidia (one of the best-performing stocks of 2023). That's because the chipmaker alone makes up more than 6% of the entire S&P 500 index and is responsible for roughly one-third of the index's nearly 11% year-to-date return. (Here's how to invest in AI.)

Yet, some professional investors and analysts quip that the stock market is basically priced for perfection right now and is, therefore, risky. If the Fed pursues a higher-for-longer interest rate strategy and rate cuts don't arrive this year, as expected, it could be perceived as a negative for equities markets. Still, history shows that you'll want to continue contributing to your portfolio, for retirement or otherwise, though it won't hurt to be slightly more selective regarding your picks.

Without a doubt, continuing to invest with markets at all-time highs can feel like a leap of faith. To address that, legendary investor Peter Lynch once said, "Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves." Indeed, going back over 50 years to 1970, investments made with the S&P 500 at an all-time high were higher in value a year later approximately 70% of the time.

Additionally, even if a market correction — or crash — is imminent, investors with long-term goals will typically recover handsomely. For instance, an investment in an S&P index fund right before the major downturns experienced in October 2007 (Great Recession) or February 2020 (COVID-19 pandemic) would be up over 205% or 41% today, respectively.

Rather than trying to guess the machinations of the stock market, it's better to employ an investment strategy like dollar-cost averaging. With dollar-cost averaging, the same amount of money is invested at fixed intervals. That way, you buy more shares when prices are lower and less shares when prices rise. However, you'll never cease to participate altogether.

At the opposite end of the spectrum from investors cautious about investing at all-time highs are investors who are overconfident in continued rallies, which can prove another mistake. Presently, the S&P 500 is trading at 20.3 times forward earnings, which is a significant premium to the average of the past 10 years, which is 17.8 times forward earnings. Keep in mind, though, no matter how well a company is run or how profitable it is or how fast it's growing, at some point, that goodness is fully factored into the share price. Valuations beyond that point may represent significant premiums that you'll want to avoid.

A better strategy to prepare for a market correction is to diversify your portfolio so that you're not overweight and overexposed to any one particular sector. You don't have to completely abandon the current market darlings, but mix in some value stocks as well. Investors who are closer to reaching retirement age may want to consider preserving capital by selling some of their equities portfolio in favor of fixed-income securities. This class includes things like bonds and certificates of deposit, which are now yielding decent returns after more than a decade of near-zero percent interest rates.

Just because the major stock market indexes are trading near all time highs doesn't mean that you should stop investing. That said, it would definitely be prudent to consult with a financial adviser (see our tips for choosing a financial adviser) about managing your level of risk.