The S&P 500 (SNPINDEX:^GSPC) fell below 7,500 on Tuesday, as the broad index has been struggling in the days following the midterm elections. Concerns are mounting as to what policy changes may take place with the Democratic Party winning control of Congress.
Plus, there may be more rate hikes coming, which could weigh on tech stocks and impact the heavy spending in the sector. And with tech stocks accounting for a large part of the S&P 500 index, if they crash, they could bring down the index in the process.
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There could potentially be a crash coming in the near future, but that doesn’t mean investors should rush to sell all their stocks. Instead, this is what billionaire investor Warren Buffett says investors should do.
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Panic can create buying opportunities
Buffett is known for being a stable, calculated investor and being willing to buy when others are too afraid to do so. Having discipline is key for investors to ensure that emotions don’t impact their decisions. In the heat of the moment, a stock may seem like a good or bad buy, when in reality, the opposite may be the case.
A market crash or any type of panic can, for that reason, be a welcome sight for prospective buyers. Buffett goes so far as to say that, “Widespread fear is your friend as an investor, because it serves up bargain purchases.”
But when those opportunities come up, Buffett says the time to act could be brief. “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.”
In a market crash, there can of course be amazing buying opportunities. But when the outlook is grim, it’s difficult to have a positive outlook for a stock and be confident that it won’t simply go lower. But Buffett’s advice is clear: be ready and be willing to buy when the value is there.
Investing in quality companies can help reduce risk for investors
One way for investors to act quickly when the market is in turmoil is to set up a watch list and, in addition, assign price targets for a good entry point. That can be done via an app or a spreadsheet, making it easy to see whether a stock has fallen to that level, regardless of the reason.
I like to look at 2022 as an example here. The S&P 500 crashed by 19% that year, and solid tech stocks such as Microsoft, Alphabet, and Amazon all declined heavily. They crashed between 29% and 50% that year. Objectively, those are all quality businesses to invest in and are prime examples of the types of stocks that, should they fall in value, investors should be ready to pounce on.
