Over the last five years, the S&P 500 has delivered a total return of 115% to investors. It’s been a pretty impressive run, especially considering this includes the rough stock market correction of 2022. But with uncertainty brewing surrounding tariffs and US economic growth, this winning streak might soon come to an end.
While few experts are predicting a US stock market crash right now, the S&P 500 will undoubtedly drop sharply again at some point in the future. And when it does, investors need to be intelligent.
By avoiding the critical mistake that most investors make, wealth can potentially flourish rather than being decimated.
Golden rule: don’t panic
In the short term, the stock market is incredibly erratic. That makes it exceptionally difficult to predict, even by experienced experts. This has been demonstrated countless times throughout history, and investors have once again seen it first-hand in April.
When tariffs were first announced, experts predicted a new recession and sky-high inflation. Investors panicked, sending the S&P 500 crashing by double-digits in a matter of days. And yet, just as soon as things seemed to be getting worse, the index rallied.
Within less than a month, the S&P 500 fully recovered, before going on to reach new record highs. And anyone who sold at the bottom has subsequently missed out on a 33% return.
History has shown countless times that when the stock market collapses, one of the best moves is to simply do nothing. Investors who just sat on their hands throughout April suffered some painful losses initially, but ultimately recovered and went on to enjoy a 17% gain.
Some have earned even more by capitalising on the chaos and loading up on fantastic stocks while everyone else was busy selling.
Focus on the long run
Arista Networks (NYSE:ANET) is one of many S&P 500 stocks that suffered a major sell-off in April. In fact, within two days, it had lost 20% of its market capitalisation. Yet even with the disruptive forces of tariffs, the group’s networking infrastructure technology didn’t lose its critical status. And investors who remained focused on the long run and snapped up more shares have gone on to enjoy a staggering 121% return!
Today, Arista continues to show promising long-term potential. The group’s positioned itself as a leader in high-bandwidth networking, benefiting from cloud adoption trends as well as increasing AI data centre investments. So much so that the group’s latest results firmly beat expert predictions, sending shares flying once again.
Of course, no stock, even those in the S&P 500, is without its risks. Beyond a lofty valuation, the group has enormous levels of customer concentration.
More than a third of its top-line income stems from Microsoft and Meta Platforms. Apart from limiting its negotiating power in product pricing, should either of these companies decide to swap to a competing supplier, Arista could become massively disrupted, likely sparking enormous volatility.
While that’s a significant risk, the industry-leading quality of its hardware and software acts as a natural buffer. And while the valuation’s definitely pricey today, that may no longer be the case when the S&P 500 suffers another crash in the future. That’s why I’m patiently waiting for a new opportunity to buy more in the future.
