Every Investor Ought to Implement This Stock Market Action Prior to 2025
As we approach the tail end of 2024, it's high time to start mapping out our financial strategies for the upcoming year. Whether it means maxing your retirement contributions, wrapping up charitable donations, or simply tightening your monthly budget, now's the perfect moment to assess your financial situation.
However, if you're venturing into the world of stocks, the present circumstances warrant a closer look at your portfolio. With stock prices at record-breaking heights, many investors are growing increasingly anxious over the possibility of a looming market bubble that might imminently burst.
Although it's not in our power to accurately forecast the market's future moves, there's one essential action every investor should take right now: reassess the fundamental strength of your investments.
Is it time for the market to take a downturn?
While we can't pinpoint the exact date of the next market slump, one thing is certain: even the mightiest bull markets won't last forever. Since October 2022, the S&P 500 has climbed a staggering 70%, and stock prices might continue to surge for months, or even years, on end.
Nonetheless, there's plenty to warrant caution in the current climate. Some experts predict that the U.S. economy will land softly in 2025, while other organizations, such as the New York Fed, warn of a 42% likelihood of a recession within the next 12 months [Nov 2024 data].
Billionaire investor Warren Buffett, who previously gauged the market's direction using the "Buffett indicator" (the ratio of the total U.S. stock market value to GDP), hinted at a potential market downturn on the brink of the dot-com bubble burst in 1999. At that time, the Buffett indicator stood at 203.09%, significantly higher than the threshold of 70% to 80% Warren suggested as a good investment opportunity [Forbes essay, 1999].
While this metric isn't infallible, it's a strong indication to tread lightly and consider the strength of your investments.
The most crucial move you should make right now
Despite the ambiguity surrounding the market's future, preparing for the worst is always wise. One of the best ways to safeguard your portfolio is to scrutinize the underlying fundamentals of each stock you own.
While stock prices have skyrocketed over the past couple of years, a surging stock price isn't an automatic guarantee of a strong investment. Sometimes, stocks benefit from the tide of optimism generated by collective enthusiasm for a specific industry or the market as a whole, only to fall sharply when the market experiences a correction.
Such overvalued stocks are more susceptible to downturns and may represent a risky investment, especially with a potential downturn lurking on the horizon.
Consequently, now is the perfect moment to perform an in-depth assessment of your portfolio and presently removed any stocks that no longer meet your investing criteria.
Identifying an overvalued stock
Determining whether a stock is still a solid investment can be tricky, given the myriad factors at play. Financial metrics like the price-to-earnings ratio (P/E), price-to-earnings-to-growth (PEG) ratio, and the enterprise value-to-EBITDA are good starting points to measure the company's growth potential relative to its stock price.
Examining the broader picture, including industry trends and the company's management team, is also crucial. A financially strong business cannot survive recessionary periods if its leadership continuously makes questionable decisions.
By conducting this due diligence, you can make informed decisions and position your portfolio for potential market corrections. Despite the uncertainty surrounding the stock market's future, there's no compelling reason to panic. Instead, use this opportunity to strengthen your investment strategy and prepare yourself for whatever the market has in store.
Given the current market situation and Warren Buffett's past warnings, now is a crucial time to reevaluate your investment portfolio and ensure the strength of your investments. By conducting a thorough assessment, you can identify any overvalued stocks and consider selling them to mitigate potential risks, as these stocks might be more susceptible to downturns in the market. Additionally, as you map out your financial strategies for the upcoming year, it's essential to consider how you might allocate your resources according to potential market conditions, possibly taking advantage of savings to invest in financially strong companies that are undervalued in the current market climate.
