If a Market Correction Is Coming, History Says This Is the Smartest Investing Move You Can Make

The S&P 500 (SNPINDEX: ^GSPC) has enjoyed a tremendous run over the past four years, more than doubling in value (up 110%). Much of its rise is connected to artificial intelligence (AI), with companies like Nvidia and Palantir Technologies leading the charge, up 2,320% and 1,680% over that time, respectively. That's still happening, but the stakes are much higher now. Hyperscalers like Amazon and Alphabet are investing billions, and soon trillions, on AI, with the rewards yet to be fully seen. Both of those companies reported negative free cash flow in the second quarter, and both insist that the results will soon flow in. Missed Nvidia in 2009? This Rare Signal Is Flashing Again. In 2009, a "Double Down" signal flashed for a little-known chipmaker called Nvidia. For the first time in years, that same "Total Conviction" signal is flashing for a company 1/100th the size of Nvidia. Continue " Image source: Getty Images. But as the market becomes more expensive, investors may not keep paying up for expectations. Take the Buffett indicator, for example, which Warren Buffett developed as an indication of how expensive the stock market is and whether or not it makes sense to buy stocks. The simple formula divides the total stock market value by the U.S. gross domestic product. Buffett explained: "If the relationship drops to 70% or 80%, buying stocks is likely to work out very well for you. If it approaches 200% as it did in 1999 and 2000, you are playing with fire." Today, it's at 297%. That doesn't mean a market crash is imminent, but it does mean that investors should be prepared for one. If a market crash is on the way, history suggests that this is the smartest move you can make. How to benefit from market crashes Believe it or not, you can benefit from market crashes. That's when you can find amazing deals on top stocks, as long as you have some cash on hand to buy them. If you have to sell losing stocks to buy other ones, you'll turn paper losses into real ones. But if you put aside some cash now, you'll be ready. Your portfolio should predominantly be made up of stocks you can hold for years or even decades. But if you own some high-growth stocks that have already appreciated in this bull market and could be at risk, now could be a good time to pocket some gains to have more cash. You might also need to rebalance your portfolio, which could involve selling even great stocks. For example, if you invested in Nvidia a few years ago and it now represents an outsize portion of your holdings, that creates risk. You would want to sell some and be better diversified, and you might want to hold on to some of the cash to invest if there's a market crash. Consider the difference if you'd invested $10,000 somewhat before the most recent crash, in 2020, or at the bottom: Data by YCharts. Data by YCharts. That doesn't mean you should stop investing today, because there's no way to know when the top or bottom is. But you should make sure you're also able to invest when stocks are under pressure. Should you buy stock in S&P 500 Index right now? Before you buy stock in S&P 500 Index, consider this: The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now... and S&P 500 Index wasn't one of them. The 10 stocks that made the cut could produce monster returns in the coming years. Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you'd have $370,440!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you'd have $1,330,110!* Now, it's worth noting Stock Advisor's total average return is 924% -- a market-crushing outperformance compared to 212% for the S&P 500. Don't miss the latest top 10 list, available with Stock Advisor, and join an investing community built by individual investors for individual investors.

If a Market Correction Is Coming, History Says This Is the Smartest Investing Move You Can Make

Інші новини компанії