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How Warren Buffett could help you to capitalise on a stock market crash in 2020

The outlook for the world economy continues to be highly uncertain. Risks, such as a global trade war, a slowing eurozone economy, geopolitical unrest in Hong Kong and Brexit could contribute to weak investor sentiment in 2020.

Therefore, there’s a chance the stock market could experience a challenging period. This may cause concern for investors – many of whom could pivot towards less risky assets, such as bonds and cash.

However, if there is a market crash, following the lead of Warren Buffett could be the best course of action. He takes a long-term view of the stock market and uses market downturns to buy high-quality businesses while they trade on low valuations. Doing likewise could boost your financial prospects.

Uncertain future

Although it’s difficult to predict how the FTSE 100 and FTSE 250 will perform in 2020, there are numerous risks facing investors that could contribute to weak sentiment. The trade war between the US and China is widely expected to lead to a reduction in global GDP, with tariffs causing inefficiencies in the global trading system. Furthermore, the eurozone’s economy has faced a period of weak growth, and may be required to put in place stimulus measures to stave off a recession.

Closer to home, Brexit is likely to dominate the political agenda even if the UK avoids a hung parliament. And with geopolitical risks present in a number of regions across the world, the prospects for investors could deteriorate in the coming months.

Buying opportunities

Of course, investors are always seeking opportunities to ‘buy low’ and ‘sell high’. For the former to occur, there must be uncertainty and risks facing the stock market. Otherwise, stocks would trade on high valuations.

Therefore, market downturns and crashes can be opportunities to buy high-quality businesses at low prices. Warren Buffett has made a super-successful career out of adopting this mentality, buying stocks during major financial crisis, such as the credit crunch, to provide himself with a more appealing risk/reward ratio on his investments.

Risks

Certainly, buying during bear markets can lead to short-term paper losses. It is, after all, difficult to find the bottom when it comes to buying stocks that are experiencing volatility. But with Buffett apparently unconcerned about how his portfolio performs over a matter of months, and only interested in its performance over decades, his strategy could be worth adopting.

With the current bull market having lasted for in excess of a decade, a bear market is moving ever-closer. No bull run has lasted in perpetuity, so it could be a good idea to build up your cash reserves in preparation for the next major downturn and the buying opportunities that it may present. This could occur in 2020 due to the risks faced by the world economy.

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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.