With the recent alarm about the discovery of the new Covid-19 variant, some are thinking that this could lead to another stock market crash. To this end, the FTSE 100 fell 3.6% on Friday, to close at 7,044 points. Although it’s very early to make a definite call on the future, I can look to the past and glean insights from legendary investor Warren Buffett. Having invested through multiple market cycles, Buffett has offered plenty of tips on dealing with things when it gets rough.
Knowing what’s going on
A great point straight off the bat from Warren Buffett is that “risk comes from not knowing what you’re doing”. That is true at all stages of a stock market cycle, but even more so during a market crash. This is because the volatility is usually elevated during periods of uncertainty.
This volatility can present opportunities, but also risk. So I need to be aware of what the potential downside is of any stocks I buy. For example, how far away is the current price from the lows of the past year? In a market crash, it could reach these levels again, so I need to be comfortable with whatever that unrealised loss might be.
I could also add unnecessary risk by not being diversified. For example, airline and travel stocks were hit the hardest on Friday. If I just bought stocks from this sector, I’d be adding a lot of risk. Rather, I’d be better off buying a mix of stocks from different areas of the economy, which should help to reduce my overall exposure to one particular area.
Planning ahead
When considering what might happen in coming weeks, another quote from Warren Buffett comes to mind. He once said that “predicting rain doesn’t count. Building arks does”.
At the moment, we’re all unsure about how much of a negative impact the latest virus news could have on the market in general. But to some extent, trying to predict it isn’t the key thing right now. It’s preparation that’s important.
Preparing myself means a few different things. For example, it involves looking at my entire portfolio and seeing what’s most at risk. Could I hedge this risk through buying some defensive stocks? Or would it make sense to buy some other assets such as gold? Thinking and acting on these points now will put me in a better position if the rain starts to pour.
Making my own decisions
As a final point, I always try to remember that my choices regarding what I buy and sell are up to me. Warren Buffett mentioned that “you never know who’s swimming naked until the tide goes out”.
The decisions of friends and other investors are completely up to them. But I shouldn’t just copy whatever they say and do. After all, a stock market crash really does show who’s swimming naked with regards to bad investment decisions!
Rather, I should be happy with the calls I’ve made, as the last thing I want to happen is for me to be sat on losses from risky stocks that I only bought to avoid the fear of missing out.
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Jon Smith and The Motley Fool UK have no position in any share mentioned. 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.
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