Key Points
- The Motley Fool stock advisors said, Don’t sell all your stocks and move to cash just because the market is at a high.
- Avoid trading with borrowed money (margin), as a market dip could wipe out your account.
- Pay close attention to a stock’s valuation and avoid buying companies that are extremely overvalued.
- History shows that timing the market is nearly impossible and often leads to worse results.
The U.S. stock market has been on a tear, hitting record highs despite all the economic uncertainty. When stocks are soaring like this, it’s easy to get caught up in the excitement. But it’s also a time to be extra careful and rational. The Motley Fool stock advisors said that here are three common mistakes to avoid when the market is at an all-time high.
First, don’t panic and sell everything. It might feel smart to “take profits” when your stocks are up, but history shows that selling everything and going to cash is a bad move. You’ll likely miss out on even bigger future gains and get hit with a hefty tax bill. Studies show that investing at all-time highs produces returns that are just as good as investing at any other time. The key is to stay patient and let your winning stocks continue to grow.
Second, don’t get greedy and trade with borrowed money. When you’re making money, it’s tempting to think you’re a genius and borrow from your brokerage to buy even more stocks. This is called trading on margin, and it’s incredibly risky. If the market suddenly drops, you could get a “margin call,” forcing you to sell your stocks at a loss or even wipe out your entire account. It’s a quick way to turn a winning streak into a disaster.
Finally, don’t ignore a stock’s valuation. When prices are climbing, it’s easy to forget to check if a stock is worth what you’re paying for it. Take a hot stock like Palantir. It has gone up a lot, but its price is now over 100 times its sales. That’s a huge red flag. Buying stocks at crazy-high valuations is a recipe for poor long-term returns. Always keep a level head and make sure you’re not overpaying.
