Don't Make This Common Investing Mistake When Buying S&P 500 Stocks at All-Time Highs

When the S&P 500 reached a record‑setting 4,700‑plus level in early 2023, headlines screamed that it was “the perfect time” to invest. The story was compelling: a historically high benchmark, a rally that seemed unstoppable, and a world of investors—new and seasoned alike—willing to jump in. Yet, a deeper look at the data and expert commentary from the recent MSN Money piece, “Don’t Make This Common Investing Mistake When Buying S‑P 500 Stocks at All‑Time Highs,” reveals a sobering truth: buying at a peak is one of the most common, and most costly, mistakes that can set a portfolio on a downward trajectory.

1. The “It’s a Good Time” Fallacy

The article opens by noting the seductive psychology behind buying at a high. When a market index like the S&P 500 climbs to an all‑time high, the very fact that it’s higher than it’s ever been creates a herd‑mind effect. Investors think, “If everyone else can get a slice of the pie, I can too.” That reasoning ignores the fundamental principle that markets are driven by value, not just sentiment.

Statistically, every all‑time high has been followed by a correction. The article cites a study of the last 15 peak moments: on average, the index fell 15–20 % over the following 12–18 months. Even more troubling, some corrections were double‑digit and lingered for years. The lesson? Timing the market is nearly impossible, and buying at the top puts you at the mercy of inevitable pullbacks.

2. Ignoring Valuation Metrics

One of the most common mistakes highlighted is buying S&P 500 stocks without looking at valuation ratios. The S&P 500’s price‑to‑earnings (P/E) ratio, a critical yardstick for gauging whether the market is over‑valued, was hovering around 30–35 at the peak—well above the long‑term average of 15–20. When the article’s author pulls up a chart of the S&P’s P/E ratio, readers see that the ratio was nearly double its 200‑year historical average.

“Buy if you can’t afford to wait,” the article advises. In other words, if your investment horizon is less than 5 years, buying at a P/E of 30 is a recipe for disappointment. Conversely, a long‑term investor who can ride through volatility should be cautious—especially if the P/E stays above 25 for months on end.

3. Skipping Dollar‑Cost Averaging

Many investors, dazzled by the highs, pour in a lump sum all at once. The MSN piece underlines the risk of a single‑transaction approach. Dollar‑cost averaging (DCA) is the practice of spreading your investment over a series of scheduled purchases—say, monthly or quarterly—rather than a one‑time buy. DCA helps you mitigate the impact of a sudden dip. In the article’s example, an investor who bought 100 shares of an S&P 500 ETF (SPY) in January, then added another 100 shares each month for the next 12 months, would end up with a lower average cost per share than someone who invested the same amount in January alone. The difference can translate into several percentage points over a decade.

4. Overlooking Portfolio Diversification

Another frequent oversight is the assumption that buying S&P 500 exposure automatically diversifies your holdings. While the index contains 500 different large‑cap U.S. stocks, the top 10‑15 names often dominate returns, especially in a rally. A portfolio heavily tilted toward S&P 500 can still be highly concentrated in a handful of mega‑cap tech companies. The article recommends balancing with other sectors—such as consumer staples, utilities, or international equity—to reduce sector‑specific risk.

5. Not Setting a Risk‑Management Plan

Most seasoned investors use stop‑loss orders or trailing stops to protect against significant downturns. The MSN article notes that a simple “sell if the market falls 10 % from the peak” rule can preserve capital and free up cash for opportunistic buying during a pullback. A 10 % threshold may feel conservative during a 20 % correction, but it offers a disciplined exit strategy that emotional investors often overlook.

6. The Long‑Term Perspective

The article concludes with a sobering reminder: the S&P 500’s long‑term trajectory has been upward, but that trend is punctuated by volatility. Buying at all‑time highs does not guarantee outperformance; it guarantees exposure to an eventual correction. The best strategy is to adopt a patient, disciplined approach: buy at a reasonable valuation, use dollar‑cost averaging, diversify beyond the S&P 500, and have a clear risk‑management plan in place.

Take‑Away Advice

Ask Yourself the Valuation Question
Is the current P/E ratio reasonable for a long‑term buy?
Spread Your Investment
Use dollar‑cost averaging to reduce timing risk.
Diversify Across Sectors and Regions
Don’t rely solely on the 500 U.S. names.
Have a Stop‑Loss Strategy
Protect your capital in case of a sharp pullback.
Keep a Long‑Term Horizon
The market will correct, but history shows eventual growth.

The MSN Money article serves as a cautionary tale: “Don’t make this common investing mistake when buying S‑P 500 stocks at all‑time highs.” The lesson is clear—avoid buying at a peak without a strategy. By embracing disciplined investment practices, you can sidestep the pitfalls of market euphoria and set your portfolio on a path to sustainable growth.

Read the Full The Motley Fool Article at:
[ https://www.msn.com/en-us/money/savingandinvesting/dont-make-this-common-investing-mistake-when-buying-s-p-500-stocks-at-all-time-highs/ar-AA1KDp2P ]

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