Why I’d listen to Warren Buffett and prepare for a 2021 market crash

I think following Warren Buffett’s strategy in preparing for unpredictable market events could be a sound long-term move.

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Warren Buffett’s success hasn’t been built on an ability to predict when the next market crash will take place. In fact, the ‘Oracle of Omaha’ has rarely sought to second-guess market movements.

Instead, he seeks to position his portfolio so it can take advantage of future short-term movements. As well as a likely rise in share prices that’s led to high single-digit annual returns for indexes such as the S&P 500 and FTSE 100 over recent decades.

As such, following his lead could be a sound move. By preparing for a range of possible outcomes in 2021, including a market crash, it may be possible to obtain higher long-term returns.

The unpredictability of the stock market

The stock market’s future movements can be extremely unpredictable. The 2020 stock market crash is evidence of this. Indexes such as the S&P 500 and FTSE 100 declined by around a third in a matter of weeks. This wasn’t an isolated event. Previous bear markets have included the 2009 global financial crisis, catching many investors by surprise, both in terms of the speed of decline and the scale of stock price falls.

Due to its unpredictability, as well as a history of following a cycle, it could be a sound move to seek to avoid trying to estimate how the stock market will perform. Buffett seems to have settled on this approach, with the world’s most successful investor focusing on company facts and figures, instead of forecasts.

In doing so, he’s able to position his portfolio for a variety of future outcomes. For example, he holds large amounts of cash in case there are buying opportunities prompted by a stock market crash. Meanwhile, he holds high-quality companies that may be better placed to survive a market downturn. As well as benefit from a likely growth opportunity in the long run.

Portfolio positioning in 2021

At present, such an approach is arguably of even greater value than ever. The economic outlook is extremely difficult to predict due to uncertainty caused by the coronavirus pandemic. Should this lead to further disruption for a variety of industries, as well as rising unemployment and weak consumer confidence, a market crash could realistically take place in 2021.

However, should the vaccine rollout and the end of lockdown measures lead to a release of pent-up demand across many sectors, the opposite could be true. The stock market rally since the 2020 decline could realistically continue and provide capital growth opportunities for investors.

Therefore, following Buffett’s strategy could be a worthwhile move in 2021. It enables an investor to be prepared for a market crash through having cash in their portfolio. Similarly, by purchasing today’s undervalued shares, it’s possible to follow in Buffett’s footsteps and benefit from a likely rise in the stock market over the long run.

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.

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