1 Stock Market Move Every Single Investor Should Make Before 2025

As we barrel toward the end of 2024, it's time to begin making financial plans for the new year. That could mean maxing out your retirement accounts, finishing up any charitable donations, or simply finessing your monthly budget.

But if you're investing in the stock market, right now is a crucial time to check in on your portfolio -- and not just because we're close to a new year. With stock prices at record highs, many investors are worried that we're in a bubble that could be close to popping.

While there's no way to know for certain what the market will do in the coming months, there's one important move every single investor should be making right now.

Are we headed for a market downturn?

It's unclear when the next slump will happen, but even the strongest bull markets can't last forever. The S&P 500 (^GSPC 0.24%) has soared by close to 70% since it bottomed out in October 2022, and there's a chance stock prices will continue to surge for many more months or even years.

That said, there's still good reason to be cautious right now. While some experts predict the U.S. economy will face a soft landing in 2025, the New York Fed maintains that there's a 42% chance we'll experience a recession in the next 12 months, according to November 2024 data.

^SPX data by YCharts

Billionaire investor Warren Buffett has also issued warnings about times like these. Back in 1999, just ahead of the dot-com bubble burst, he predicted that the market was on the verge of a major downturn. The metric he used to make this prediction (which was later nicknamed the "Buffett indicator") was the ratio of the total U.S. stock market value to U.S. gross domestic product (GDP).

In an essay later published in Forbes, Buffett explained that "[i] f the percentage relationship falls to the 70% or 80% area, buying stocks is likely to work very well for you. If the ratio approaches 200% -- as it did in 1999 and a part of 2000 -- you are playing with fire."

As of November 2024, the Buffett indicator just reached 203.09%. While that's no reason to panic (Buffett himself has noted that this metric isn't perfect), right now may be a smart time to double-check that your portfolio is on solid footing.

The single best investing move you could make right now

Again, there are no guarantees that a downturn is around the corner. But it never hurts to prepare just in case, and one of the best things you can do to protect your portfolio is to check that each stock you own is based on solid fundamentals.

Stocks have been surging over the last two years, but a soaring stock price doesn't always mean that a company is a good investment. Some stocks can ride the wave of optimism, especially if investors are caught up in hype over a particular industry or the market as a whole.

If a stock is overvalued, it's trading at a price that's significantly higher than it probably should be based on its earnings outlook and growth potential. These types of stocks are more likely to face a substantial correction, making them potentially risky investments -- especially if a market downturn is looming.

Right now, then, is the perfect time to comb through your portfolio and double-check that each of your stocks deserves to be there. If you find any that are no longer strong investments, now could be a smart opportunity to sell while prices are still higher.

How to tell whether your stock is overvalued

It can be tricky to determine whether a stock is still a strong investment, especially when there are so many factors to consider.

Metrics like the price-to-earnings (P/E) ratio or price/earnings-to-growth (PEG) ratio are a good place to start, as they can help measure the company's growth potential in comparison to its stock price. The enterprise-value-to-EBITDA is another metric that can give you an idea of where the company's earnings potential stands.

Financial metrics aren't the only way to determine whether a stock is a strong investment, though. It's also wise to look at the big picture, examining factors like industry trends and the company's management team. No matter how strong a business may be financially, if its leadership team is consistently making questionable decisions, for example, it may not have what it takes to survive tough economic times.

The future of the stock market may be uncertain right now, but there's no reason to panic. Rather, it's wise to take this opportunity to do a deep dive into your investments and ensure every stock still deserves a place in your portfolio. The more you prepare now, the better off you'll be whenever the next downturn strikes.