A second stock market crash could be relatively likely over the coming months. Past FTSE 100 and FTSE 250 bear markets have often experienced brief rebounds that are then followed by declines.
Therefore, even though the stock market has regained much of its lost ground since March, a return to falling share prices cannot be ruled out.
However, by following Warren Buffett’s advice, you can take advantage of the opportunities brought by a second market plunge. Doing so could boost your long-term portfolio returns.
Preparing for a second market crash
The possibility of another severe market downturn is an ongoing risk facing all investors. However, at the present time, there are a number of risks that could make a decline for UK shares more likely than it otherwise would be.
For example, a rise in coronavirus cases, or geopolitical risks in Europe and North America, could lead to a deterioration in investor sentiment that sends FTSE 100 and FTSE 250 stock prices lower.
As such, following Buffett’s advice and holding some cash in a savings account could be a sound move. It may also allow you to take advantage of lower stock prices in the coming months, as well as provide peace of mind should your portfolio valuation come under pressure.
Focusing on a competitive advantage
If a second market crash does occur, investing in the best UK shares you can find could be a sound move. Certainly, they may not be among the cheapest shares in the FTSE 100 or FTSE 250, but they may offer the best chance of taking part in a likely stock market recovery over the coming years.
One area that Buffett has repeatedly focused on when investing is companies that have a competitive advantage over their peers. For example, they may have a unique product, a lower cost base, or enjoy stronger brand customer loyalty than their peers. This may enable them to survive a period of weaker sales, and also enjoy greater profit growth in a subsequent economic recovery.
Value investing
Of course, a market crash provides the opportunity for investors to access lower prices for UK shares across the FTSE 100 and FTSE 250. Although it’s difficult to buy any stock when it trades at its lowest level, following Buffett’s advice and paying a fair price for a high-quality business could lead to high returns in the long run.
With the stock market having a solid track record of recovery following its various bear markets since inception, buying undervalued shares when their near-term prospects are challenging could prove to be a sound move.
It may not lead to you becoming a billionaire, as per Warren Buffett, but it could significantly improve your long-term financial prospects through boosting your portfolio’s performance.
