The Motley Fool

Why I’d Listen to Warren Buffett and Prepare for a 2021 Market Crash

Image source: Getty Images

 Warren Buffett’s success has not 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 that it can take advantage of future short-term movements, as well as a likely rise in share prices that has 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, with indexes such as the S&P 500 and FTSE 100 declining by around a third in a matter of weeks. This was not an isolated event, with previous bear markets such as 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 in future. Warren 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, Buffett is 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 the present time, 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 a 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 Warren 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 is possible to follow in Buffett’s footsteps and benefit from a likely rise in the stock market over the long run.

Looking for the Next Potential Netflix? We’ve Got You Covered with These 3 Free Stock Picks

Motley Fool Canada's market-beating team has just released a new FREE report that gives our three recommendations for the Next Gen Revolution.
Click on the link below for our stock recommendations that we believe could battle Netflix for entertainment dominance.

Click Here to Get Your Free Report Today!

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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.