History Says a Stock Market Sell-Off Is Coming Eventually. Here's the Smartest ETF to Buy Right Now.

The stock market has seen remarkable growth over the past three years, with major indices like the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average experiencing significant gains. However, one metric that signals potential overvaluation is the Shiller cyclically adjusted price-to-earnings (CAPE) ratio. This metric compares current stock prices to 10 years of inflation-adjusted earnings, and its current value of nearly 41 is far above the historic average of 17.8. This suggests that stocks may be overvalued, not unlike the dot-com bubble burst.

While a bear market's arrival is uncertain, several warning signs point to potential market instability. Notably, most recent gains in the market are concentrated in artificial intelligence stocks, with four out of ten stocks in the S&P 500 actually declining this year. To navigate potential market downturns, diversification is crucial.

The Vanguard S&P 500 ETF (VOO) is an excellent choice to achieve this diversification, as it offers exposure to all market sectors, including technology, energy, industrials, and consumer goods.

Historical evidence supports the benefits of staying invested during market downturns. Research from J.P. Morgan, based on 20 years of market data, reveals that 7 of the 10 best days in the market occurred within two weeks of the 10 worst days. Investors who remained in the market during these downturns saw total returns more than double those who missed out on the best days.

Therefore, maintaining a long-term investment strategy and staying the course is the most prudent approach to weather market volatility and benefit from the market's historic growth potential.