When It Comes to Managing Fear, Warren Buffett Has the Best Advice for Investors

Lots of things in life are scary — skydiving, raising a child, and public speaking, to name a few. But the fear that comes with investing is in a class of its own. When the market gets volatile, the future is uncertain and your money’s on the line. That set of circumstances can raise your blood pressure, keep you up at night, or push you into rash decisions.

Billionaire investor Warren Buffett arguably has seen more market volatility as an active investor than anyone. He started investing at age 11 and he’s still at it today, 80 years later. Buffett often talks about fear, and his perspective may surprise you.

Read on for three of Buffett’s best quotes on managing fear — and then use them to better your own investing practice.

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1. Fear can be your friend

“Fear is the foe of the faddist, but the friend of the fundamentalist.”

Think of the faddist as the investor who targets short- and medium-term profits. This is the trader who buys hot stocks, sells them for quick gains, and then moves on to the next opportunity.

A fearful investing climate isn’t ideal for the faddist because the opportunities dry up. When share prices are falling across the board, stocks with momentum are harder to find.

Then there is the fundamentalist, also known as the value investor. This person prefers stocks that are priced below their true value. The idea is to buy shares for less than their actual worth, and then see gains as the share prices rise over time.

A fearful investing climate increases opportunities for the fundamentalist. When investors are predominantly selling, share prices go down — sometimes to less than what they’re worth. That’s when the fundamentalist can pounce, picking up great stocks for temporarily low prices.

As the market recovers, these stocks should rebound, giving those new shareholders a nice boost in wealth.

2. You don’t have to lose when fear prevails

“A ‘flash crash’ or some other extreme market fluctuation can’t hurt an investor any more than an erratic and mouthy neighbor can hurt my farm investment.”

In response to this quote, you might assert that losing 15% of your retirement wealth actually does hurt, and quite a lot. You’ll get no argument from me on that — though I will share another perspective.

At the bottom of the 2020 stock market crash, the S&P 500 had lost one-third of its value. Five months later, the benchmark index had recovered those losses and returned to growth. At that point, the downturn was essentially irrelevant for S&P 500 investors who kept their portfolios intact. Only those who sold shares at the trough had lost wealth in the downturn.

The 2020 market crash was unusually quick to come and go. Most downturns, including the one we’re in now, will last longer. But the concept is the same. You can sidestep long-term damages by waiting for a recovery.

If you are diversified, your portfolio will survive this tough market. Some of your stocks may get hit hard. Some may not recover. But stocks that emerge stronger will make up for the ones that faltered.

3. Know your limits

“Some people can handle [fear] psychologically. If you can’t, then you really shouldn’t own stocks, because you’re going to buy and sell them at the wrong time.”

There’s no shame in knowing your limits and managing your wealth accordingly. If you know that down markets compel you to sell, then adjust your approach.

For example, you could invest only in dividend funds or fixed-income funds. Both produce cash (or more shares if you’re reinvesting). You won’t be as quick to sell an investment that’s producing, even if the share price dips.

Shift your focus and stay calm

Fear is a part of investing. You can’t avoid it, but you can manage it. To shift your focus away from a dwindling portfolio value, look for opportunities in this down market. Low-priced income-producing assets might be a good fit if you’re worried about ongoing declines.

Remember, too, that market downturns are temporary. The cycle might last months or years, but it will end eventually. Avoid drastic moves now, and your portfolio can return to growth later — almost like nothing happened.

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