2 Incredibly Costly Mistakes Too Many Investors Are Making Right Now

When the stock market is climbing higher, investors often make two common mistakes. One is that they will chase high-flying stocks without any regard to valuation or the long-term outlook for a company's business. This is often referred to as the fear of missing out, or FOMO.

Now, just because a stock has skyrocketed higher does not automatically mean it isn't a buy. For example, if you bought Nvidia (NASDAQ: NVDA) up after a 500% run, you would still have been able to make a lot of money on your investment. In the case of Nvidia, the company was a market leader with a wide moat that continued to see extraordinary growth and generally traded at a reasonable forward price-to-earnings (P/E) valuation. In fact, that is still the case today, and it's why the stock still looks attractive even after a 1,030% gain over the past five years.

However, Nvidia is more of an exception than the rule. In fact, J.P. Morgan found that between 1980 and 2020, more than 40% of stocks in the Russell 3000 suffered losses of 70% or more, from which they never fully recovered. That is why FOMO can get investors in trouble.

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Avoid trying to time the market

The other big mistake investors can make when the market is strong is the opposite of FOMO: It's waiting for a market pullback. Bull markets can last a long time, and the S&P 500 index reaching all-time highs isn't uncommon. In fact, according to J.P. Morgan, it has happened on about 7% of all trading days since 1950. Meanwhile, on a third of those occasions, the market never traded lower. That means if you were waiting for a pullback, it never came.

The other big consideration with waiting for a pullback is that investors also need to time getting back in, which isn't easy. I sold a lot of my portfolio right when the pandemic hit. While I timed my selling pretty well, I didn't expect the market to rally so quickly. Ultimately, I would have just been better off staying in the market rather than trying to time it.

Given these two costly but seemingly opposite mistakes that investors can commit, my best advice is to use a core index exchange-traded fund (ETF), like the Vanguard S&P 500 ETF (NYSEMKT: VOO), and consistently dollar-cost average into it over a long period of time. Because the overall market is typically driven by a small handful of winners, like Nvidia, investing in low-cost ETFs that track market-cap-weighted indexes is a great strategy. These indexes naturally let their winners continue to grow and their losers fade with no emotions involved. It removes stock-specific risks and allows time and compounding to do their jobs.

JPMorgan Chase is an advertising partner of Motley Fool Money. Geoffrey Seiler has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends JPMorgan Chase, Nvidia, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.