Consistency and keeping emotions in check are essential to building a lasting portfolio.
Since the start of 2023, the Nasdaq Composite has surged 72%, while the S&P 500 has risen an astounding 45%. Some investors may feel that the market is overextended.
In addition to many stocks trading higher than their historic valuations, there are a number of economic indicators, from the U.S. money supply to the housing market and consumer conditions, that suggest the market could face selling pressure or even a correction.
Here are three mistakes to avoid in the second half of 2024 and how to prepare for whatever the market brings over the rest of the year.
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1. Review your portfolio
Changing your investment strategy or portfolio based on emotions is one of the worst decisions you can make. History has shown that holding through periods of volatility is a winning strategy, even when the stock market sells off. The Nasdaq Composite Index and the S&P 500 experienced sharp declines in 2022. However, since then, both indexes have recovered more than enough to make up for those losses.
Even if investors had a crystal ball and knew the market was going to sell off, it would still be better to endure the dip than to sell and never come back up. The reason timing the market is a bad idea is because it requires two correct decisions: when to sell and when to buy, whereas buying and holding a great company only requires one correct decision.
Now is a good time to review your portfolio and ensure your investments are aligned with your risk tolerance. If certain sectors or themes significantly outperform others, your portfolio allocation may change completely. For example, if you held even a small amount of stocks such as Nvidia or Meta Platforms, which have risen several times in value in a relatively short period of time, you would likely have significantly increased your holdings of these companies.
Of course, you could scale back your positions and reduce your weighting. But another solution is to change how you allocate new capital. Investors who regularly pump new savings into their portfolios can simply invest that money in completely different companies. For example, if you feel you have too much exposure to tech stocks, consider a different sector. You could also consider exchange-traded funds (ETFs) that allow you to diversify across a variety of companies.
In summary, there is a clear difference between restructuring your portfolio and making adjustments. The key is to have peace of mind, and the best way to have peace of mind is to know what you own and why you own it. You also need to make sure that your portfolio is not taking on more risk than you want it to.
2. Follow popular stocks
We talked earlier about how allocations can change based on having a large percentage of your portfolio in blue chip stocks, which is a good problem to have. But there is also the exact opposite scenario.
If you didn’t own mega-cap growth stocks from the start of 2023, it would have been very hard to keep up with the major indexes. There were plenty of companies performing well across sectors, but generally speaking, the technology and communications sectors have been driving the market rally.
It’s wise to be careful not to let the “fear of being left behind” get you buying a hot stock just because you think it might keep going up, without fully understanding what the business is all about. But that doesn’t mean you should avoid every stock that’s soaring.
Microsoft (MSFT, 1.64%) is my favorite example of a large growth stock that has delivered phenomenal gains in recent years, yet remains arguably undervalued. The company boasts its highest operating margins in a decade while accelerating revenue growth and is returning record capital to shareholders through share buybacks and dividends. It has a clear path to more than triple its market cap within the next 11 years.
So while buying popular stocks for speculative reasons is a bad idea, it’s also a mistake to completely write off a company or assume you shouldn’t buy just because its share price is at an all-time high.
3. Investing in mediocre businesses
Another mistake to avoid in the second half of 2024 is putting capital into low-quality businesses.
There are many ways to value a company, but it essentially boils down to whether the company can continue to grow earnings and meet investor expectations. To do that, you need a strong balance sheet and a manageable debt position, competitive advantages, preferably in multiple product or service areas, strong free cash flow to reinvest in the business, innovation, a willingness to adapt and take risks, and the ability to meet dividend and share repurchase expectations if that’s part of the value proposition.
Procter & Gamble (PG 1.32%) is an example of a quality business. The company has a portfolio of leading brands across multiple consumer goods categories. The company has raised its dividend every year for 68 consecutive years and regularly has excess cash for share buybacks. Management avoids over-expanding the business, prioritizing reinvestment in existing brands. Procter & Gamble is a simple, boring, but effective dividend stock you can rely on no matter what the economy is doing.
In contrast, lower quality companies may become over-indebted and over-leveraged simply because things are going well now, exacerbating losses during a downturn. Also, companies may have had success for years or even decades, but become complacent with poor management and lose market share over time.
Another form of this mistake is to use stock price as a criterion for whether it is a good business. Just because a stock price outperforms a major index in the short term does not mean that it is a good business. There are many examples of once-popular stocks that have collapsed or suffered irreparable losses. Stock prices and short-term performance only reflect the consensus of market sentiment at that moment. Over the long term, fundamentals tend to win out, bubbles burst, stories fade into history, and new players step into the spotlight.
No one knows what the future will bring, but investing in your most conviction ideas and maintaining diversification through individual holdings, ETFs, or both can help you avoid a bad company from ruining your portfolio. As mentioned earlier, it is very important to pay close attention to your allocation to ensure your portfolio is not too concentrated in companies you feel comfortable with.
Developing Healthy Habits
All investors make mistakes, and if you’ve been investing for any length of time, you may have made some particularly tough decisions that you’d never want to do over again.
While you can’t prevent all mistakes, you can take steps to minimize them.
We hope these lessons help you apply checks and balances to your portfolio and set yourself up for success later this year and for decades to come.
Randi Zuckerberg, former director of market development and public relations at Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Daniel Folber has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Meta Platforms, Microsoft, and Nvidia. The Motley Fool recommends long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
