Warren Buffett: 3 Steps to Take to Protect Your Portfolio Before a Market Correction

Warren Buffett prepares for a market crash better than others. His three steps should guide investors in the current situation. Investing in the Fortis stock is also a recommended strategy because of the company’s sound and defensive business model.

| More on:
stock market

Image source: Getty Images

Warren Buffett was in the front row during the most famous stock market crashes in his time. He witnessed the Black Monday in 1987, the dot.com bubble in the early 2000s, and the 2007-08 financial crisis. While the causes in each were different, it all led to a market collapse of epic proportion. COVID-19 is the latest catastrophic event.

Another crash is possible in 2021 with the new coronavirus variants that are more transmissible. Also, government transfers or stimulus packages could be a recession trap. If that’s the case, what steps should people take before a market crash? You can learn from Buffett and use his tips as a guide.

Stay invested and remain calm

The trick is to remain calm and don’t liquidate your because, throughout history, stocks deliver superior returns over time. Buffett said that it’s a terrible mistake to try to dance in and out of the market due to experts’ predictions. He adds the risks are higher when you’re out of the game than the dangers of being in the market.

Don’t time the market

Buffett’s Berkshire Hathaway experienced significant dips during the market downturns. The GOAT of investing said regarding his shares’ decline, “No one can tell you when these will happen. The light can at any time go from green to red without pausing at yellow.” While these pullbacks and broader drops are painful, trying to time them is a futile exercise.

Invest in sound business models

Apart from staying calm to help maintain a clear head and prepare for a crash, Buffett advises investors to invest in companies with sound business models and strong competitive advantages. While their share prices could plummet, too, you’ll likely experience a smaller negative impact on their underlying businesses during these periods. Detach stock price performance from business performance.

Overcome your fear

If you need to overcome your fear about a market correction, use a risk-averse investor’s tactical strategy. Rebalance your portfolio beforehand and seek defensive or recession-resistant assets. The utility sector isn’t as exciting as the tech sector, for instance, although utility stocks’ value stays pretty constant regardless of the market environment.

Fortis (TSX:FTS)(NYSE:FTS) ranks among the top very low-risk TSX stocks. The pandemic didn’t trample on the business as it did with other companies in various sectors. In 2020, the price hardly moved, and Fortis shares closed the year with a negligible negative 0.04% return.

Currently, the utility stock trades at $51.90 and pays a decent 3.98%. Since the bulk of Fortis’ revenue comes from regulated rates, predictions of a market crash shouldn’t frighten you. For years, this $24.23 billion regulated electric and gas utility company has held its ground against economic meltdowns. The pandemic is no exception.

Management also promises to raise dividends by 6.4% annually through 2024. A boring investment with defensible cash flow streams is never a wrong choice. Expect Fortis to deliver a stable yield for decades to come. You can grow your future savings or retirement fund and not mind the noise or doomsday predictions.

Shopping opportunity

Warren Buffett’s tips are relevant and applicable to the current situation. Also, the famed investor expects a clearance sale during a market crash. It’s a rare time to own high-quality and wonderful businesses trading at significant discounts to their fair value.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Christopher Liew has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool recommends FORTIS INC and recommends the following options: short March 2021 $225 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and long January 2023 $200 calls on Berkshire Hathaway (B shares).

More on Investing