The market has been wobbly lately, with the S&P 500 (SNPINDEX: ^GSPC) and Nasdaq Composite (NASDAQINDEX: ^IXIC) dipping by nearly 3% and 6%, respectively, over the past month.
Some stock market indicators are also sounding the alarm. The S&P 500 Shiller CAPE Ratio, which measures whether the index is over- or undervalued, is reaching heights not seen since the dot-com bubble burst. Back then, the ratio reached a record high of around 44. As of this writing, it’s just over 41, the second highest point in history.
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The Buffett indicator, named after Warren Buffett, is also at record highs. This metric measures the relationship between the total value of U.S. stocks and GDP, and according to Buffett himself, investors are “playing with fire” when it nears 200%. Currently, this metric sits at around 234%.
To be clear, this doesn’t necessarily mean that a market crash is imminent or that we’re in a bubble that’s about to pop. The market is incredibly complex, and trying to predict what will happen in the near term can be costly. Fortunately, there’s one move that history says never steers investors wrong.
History says this is the best move investors can make
While it’s impossible to say when the next downturn will begin, it’s bound to happen eventually. And when it does, investors who own a healthy portfolio of quality stocks will win out.
Many stocks have experienced unprecedented growth in recent years, but a soaring stock price doesn’t necessarily mean the underlying company is healthy. Some stocks are fueled by hype and speculation, so even if they appear to be thriving on paper, they could be incredibly overvalued and due for a pullback soon.
During the dot-com bubble in the early 2000s, for example, hundreds of tech companies crashed and burned. Although many of these high-profile stocks had soared in valuation in the years leading up to the bursting bubble, factors such as unsustainable business models and poor finances made it impossible for them to survive the bear market that followed.
Not all tech companies failed during that time, though. Those with solid fundamentals were resilient enough to weather the collapse of the tech sector, and the S&P 500 itself has delivered total returns of more than 700% since 2000.
