Key Points
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There are many different variables that are contributing to a feeling of uneasiness among the investment community right now.
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Building up cash reserves is a smart move that will enable buying activity when stocks go on sale.
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Long-term investors shouldn’t try to time the market.
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Warren Buffett’s career leading Berkshire Hathaway spans roughly six decades. Over that extended period, he lived through many different environments in which stock prices tanked. While these adverse events certainly tested his temperament, they also gave the Oracle of Omaha invaluable experience. He’s better able to navigate the turmoil.
This is the perfect time to turn our attention to the current environment. Despite the S&P 500 (SNPINDEX: ^GSPC) rising 12% this year (as of Nov. 4), investors are worried that more bad days like Nov. 5 could be coming. Geopolitical turmoil, intense midterm elections, elevated valuations, higher-for-longer interest rates, and concentration in the artificial intelligence trade are sparking fears of a major downturn in the not-too-distant future.
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It’s time to listen to the legend. If you’re bracing for a market crash, consider Warren Buffett’s top advice to help in this situation.
Prepare to take action
No one has a clue when the next bear market will come. But it will happen eventually. According to Hartford Funds, these have occurred approximately every five years since 1945. The best investors are always prepared for the inevitable slide.
If you’re expecting a market crash sooner rather than later, building a cash reserve is a smart move. The exact figure can differ. Some investors might be fine with their cash holdings representing 10% of their portfolios, while others might go as high as 30% or more. Either way, this will enable you to play offense and be aggressive when high-quality stocks go on sale.
One of Warren Buffett’s most famous quotes suggests that investors should be greedy when everyone else is fearful. Doing the average thing, which is keeping your cool and staying level-headed while the rest of the market is in a state of extreme panic, is what separates good investors from the bad.
Don’t try to time the market
Buying the dip is a sound strategy. And having enough cash on hand to act when a bear market hits lays the right foundation. This can support strong portfolio gains over time.
However, there’s another side to this coin. Investors shouldn’t try to time the market. You might get lucky. But chances are that after you buy stocks, their prices can continue to fall. Predicting the exact tops and bottoms is a waste of effort.
Warren Buffett’s successful career was built on patience, discipline, and a relentless focus on the long term. The best course of action for investors who are bracing for a market crash might simply be to continue allocating money to stocks. Decades from now, it won’t really matter at what prices you bought.
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Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.
