Why I’d follow Warren Buffett and hold some cash after the 2020 stock market crash

Using Warren Buffett’s strategy of holding some cash could be a means of capitalising on a stock market crash, in my opinion.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Warren Buffett has a long track record of using stock market crashes to his advantage. After all, his strategy centres on seeking to buy high-quality companies when they trade at low prices. Often, such a situation occurs when a market downturn has recently taken place.

Since the next stock market decline could occur at any time, being prepared for the next one could be a sound move. By holding some cash, it is possible to be ready to capitalise on lower stock prices that may only be available temporarily.

The next stock market crash may not be far away

Predicting when the next stock market crash will occur is extremely difficult. After all, it can be prompted by a large number of factors that themselves are tough to estimate. For example, the 2020 market decline was caused by coronavirus, the course of which very few investors were able to predict even once it began to take place.

Therefore, being in a position of constant preparedness for the next bear market could be a sound move. History suggests that no stock market rise ever lasts in perpetuity. This means that an investor who waits for the next market downturn may be able to use it to buy cheap shares, as Warren Buffett has done previously.

Holding cash like Warren Buffett

Warren Buffett holds significant sums of cash at all times. This provides him with the means to invest at short notice should opportunities arise. Furthermore, it means he is liquid, in terms of having access to funds that can quickly be invested, in case there is a sudden resurgence in share prices. This took place following the 2020 stock market crash, when many share prices experienced a rally after their short-term declines.

Of course, holding cash could mean lower returns than the stock market offers during a period of growth. Low interest rates mean that it is now difficult to obtain an inflation-beating return in some areas. However, this could be offset by the chance to be ready for the next market downturn, when low share prices may provide scope for long-term capital gains.

Investing in solid businesses

As well as holding cash in preparation for the next stock market crash, analysing current holdings to make sure they are financially sound could be a shrewd move. For example, ensuring they have solid balance sheets and competitive advantages in a changing world economy may lead to less risk and higher returns.

Furthermore, holding stocks that have wide margins of safety could be a logical approach over the long run. When combined with having cash on hand in case a market downturn suddenly takes place, this may lead to less risk and higher returns in what may prove to be a volatile stock market over the coming years.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

How this rocketing FTSE 250 stock is tapping into the billionaire-making AI revolution

As the AI revolution mints new billionaires, this high-flying FTSE 250 company has been making its shareholders wealthier too.

Read more »

Investing For Beginners

4 actionable stock market investing habits that can boost my profits

Jon Smith looks at the stock market and explains how he picks the right shares to buy, running through a…

Read more »

Investing Articles

The Standard Chartered share price leaps on FY dividend and buyback news. Time to buy?

An 8% jump for a UK-listed bank on 2023 results? That's what just happened to the Standard Chartered share price.…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Can Lloyds shares get any cheaper?

Lloyds shares have fallen further following the release of the bank's 2023 results. This Fool senses now is a time…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

£7,000 of money to spare? Here’s how I’d aim to turn that into £1,000 in annual extra income

Christopher Ruane explains how he would aim to generate a four figure income to cushion his future, all with dividend…

Read more »

British union jack flag and Parliament house at city of Westminster in the background
Investing Articles

Is this stellar dividend growth stock the only no-brainer buy on the entire FTSE 100?

Picking shares requires careful thought and analysis, but this FTSE 100 growth stock appears to be pressing all the right…

Read more »

Investing Articles

I bought 422 Glencore shares in July and 232 in September. Here’s what they’re worth now

Glencore shares have had a rough ride leaving Harvey Jones out of pocket. Should he cut his losses or average…

Read more »

Man smiling and working on laptop
Investing Articles

Here’s why I’m investing most of my savings in FTSE 100 shares!

I think investing in FTSE 100 shares is one of the best ways that UK investors can make long-term returns.…

Read more »