Warren Buffett’s success is not based on the ability to predict when the next market crash will occur. In fact, the Omaha Oracle has rarely tried to reconsider market movements.
Instead, he tries to position his portfolio to take advantage of future short-term movements as well as a likely surge in stock prices that has resulted in high single-digit annual returns for indices like the S&P 500 and FTSE 100 over the past few decades.
As such, following his example might be a wise move. Preparing for a number of possible outcomes in 2021, including a market crash, could potentially generate higher returns over the long term.
The unpredictability of the stock market
Future movements in the stock market can be extremely unpredictable. The 2020 stock market crash is proof that indices such as the S&P 500 and the FTSE 100 are falling by around a third within a few weeks. This was not an isolated incident as earlier bear markets such as the 2009 global financial crisis surprised many investors in terms of both the rate of decline and the extent of the decline.
Given its unpredictability, as well as its past cycle-following, it might be a sensible move not to attempt to gauge future stock market performance. Warren Buffett seems to have taken this approach. The most successful investor in the world focuses on company data and numbers instead of forecasts.
This allows Buffett to position his portfolio for a variety of future outcomes. For example, he holds large amounts of cash in case there are purchase opportunities triggered by a stock market crash. Meanwhile, he holds good quality companies that may be better able to weather a market downturn and benefit from a likely growth opportunity over the long term.
Portfolio positioning in 2021
Today, such an approach is arguably more valuable than ever. The economic outlook is extremely difficult to predict due to the uncertainty caused by the coronavirus pandemic. Should this lead to further disruptions for a large number of industries as well as rising unemployment and weak consumer confidence, a market crash could realistically occur in 2021.
However, should vaccine rollout and the end of lockdowns release pent-up demand in many sectors, the opposite could be the case. The stock market rally since declining in 2020 could realistically continue and offer investors capital growth opportunities.
Hence, Warren Buffett’s strategy in 2021 might be worth pursuing. This allows an investor to be prepared for a market crash by having cash in their portfolio. Similarly, by buying today’s undervalued stocks, it is possible to follow in Buffett’s footsteps and benefit from a likely rise in the stock market over the long term.
This article represents the opinion of the author who may disagree with the “official” endorsement position of a Motley Fool Premium Service or Distributor. We are colorful! Questioning an investment thesis – including one of our own – helps us all think critically about investing and make decisions that will help us get smarter, happier, and richer. As a result, we sometimes publish articles that may not match recommendations, rankings, or other content.