Whispers of an impending economic downturn have persisted for over a year and show no signs of abating. Despite the sturdy economy and low unemployment rates, a recent Forbes column foresees a "mild recession" in late 2023 or 2024.
In such a scenario, if you're considering investing in the stock market, the advice of Warren Buffett, the billionaire CEO of Berkshire Hathaway, could prove valuable. As Buffett famously articulated in a 2008 op-ed for The New York Times: "Be fearful when others are greedy and be greedy when others are fearful." This essentially means that during periods when others are apprehensive about investing due to a recession or its anticipation, you should seize the opportunity to acquire stocks and assets at discounted rates.
Buffett noted in the op-ed, "In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price." This principle remains relevant today, just as it was during the height of the Great Recession 15 years ago. The key takeaway is to avoid attempting to predict the precise timing of economic recovery and stock market rebound, as even experts like Buffett find such predictions elusive.
Buffett wrote, "I haven’t the faintest idea as to whether stocks will be higher or lower a month or a year from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over."
Here are five actions Buffett recommends taking before a recession sets in:
1. Build Liquidity: Maintain a healthy cash reserve to make informed decisions during the downturn, avoiding rushed choices dictated by circumstances. Although amassing billions like Berkshire Hathaway is unfeasible for most, you can still ensure your assets remain liquid.
2. Invest in Established Companies: While blue chip stocks can suffer during economic downturns, Buffett advises against shying away from companies with temporary setbacks. Most major companies tend to rebound and achieve new profit records over the long term.
3. Maintain Normal Strategy: Adopt a "business-as-usual" approach toward investing. Avoid sudden drastic changes, but also refrain from excessive stock purchasing.
4. Diversify Beyond Low-Growth Assets: Rather than confining your funds to low-yield checking and savings accounts, which may yield minimal growth, consider that equities are likely to outperform cash in the long run, as Buffett pointed out.
5. Embrace Long-Term Perspective: Understand that recessions are temporary events, while the stock market exhibits a historical pattern of growth over time. Previous instances such as the Great Depression, economic stagnation of the 1970s, the Great Recession, and the recent COVID-19 pandemic all illustrate the market's eventual recovery.
When witnessing downturns and potential investment losses amid a recession, resist panicking. Instead, maintain a mindset aligned with Buffett's, as history repeatedly attests to the stock market's resilience and eventual resurgence.
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