The investment community has long looked to Warren Buffett for advice and clues about what might happen next in the market, and for good reason. The billionaire investor has proven his expertise and generated market-boosting profits Berkshire Hathaway over time. With Buffett at the helm, Berkshire Hathaway has generated annual profits of nearly 20% over the past 58 years. That’s compared to a compound annual increase of just over 10% for the S&P500. Buffett has done this through careful stock selection, knowledge of when to be “greedy” and when to be “afraid” in the market, and his commitment to holding investments for the long term. All this has earned him the well-deserved nickname ‘the Oracle of Omaha’.
And if we believe in Buffett’s ability to predict what’s next for the market, we should take a closer look at his recent moves. They happen to represent a warning to Wall Street – and this warning has reached deafening levels. Let’s look at the details and consider what you need to do before 2025.
First, let’s look at the steps that Buffett has made that stand out. He has been a net seller of shares for several quarters. In the third quarter of this year, he built record cash levels of over $300 billion, representing 28% of Berkshire Hathaway’s asset value; that is the highest percentage in more than thirty years. And this year, Buffett significantly reduced his position in two of his favorite stocks: Apple And Bank of Americawith each down more than 20% in the last quarter alone.
However, these stock sales do not necessarily represent a lack of confidence in the underlying companies. Buffett himself even suggested at Berkshire Hathaway’s annual meeting in May that he was locking in profits on his top holdings below the current capital gains tax rate – with the idea that rate could rise. And Apple and Bank of America remain its No. 1 and No. 3 positions, respectively. It’s also important to note that Buffett believes in long-term investing and is not one to buy and sell according to market cycles.
Still, Buffett’s moves to reduce some positions and increase cash holdings, and his comments in his latest shareholder letter about “casino-like behavior” in the market, could be seen as a warning to Wall Street as indices and valuations soar rise. The S&P 500 is heading for a 26% gain this year and the S&P 500 Shiller CAPE ratio, a valuation measure, is trading at the third-highest level since the S&P launched as a 500-stock index in the late 1950s.
Based on this, here are three things you need to do before 2025 to ensure the strength of your portfolio no matter what happens in the market.
Like Buffett, you need to think ahead about future investment opportunities; For this you will need some cash. This should not be part of your emergency fund; it is intended to cover unplanned expenses that may arise in your daily life. Instead, this money is intended for investment, should good purchasing opportunities arise.
However, don’t sell solid, long-term stocks you love just to build cash. Instead, make this cash growth plan part of your monthly savings routine. Even if you have to start small and put a few dollars aside, that’s fine.
As for the exact cash level, it depends on your investment schedule and your overall budget. A general guideline is that cash should make up 2% to 10% of your portfolio. Once you’ve reached your cash level target, you can sit back and watch the market, knowing that you can put money in at any time.
Technology stocks, led by artificial intelligence (AI) giants, are clearly driving gains in the stock market today, but that doesn’t mean you should go all-in on this sector and forget about others. It’s important to diversify across sectors and stocks to maximize your chances of profit in the long term – and minimize the risk of losses. This way, if one sector suffers, your other investments can compensate. And by investing in different areas, you increase your chances of finding the next stock market star.
You can also follow another piece of advice from Buffett that will help you diversify immediately: that’s buying an S&P 500 index fund, like the SPDR S&P 500 ETF Trust (NYSEMKT: SPY). This exchange-traded fund lets you invest in the 500 top stocks powering today’s economy. Over time, the S&P 500 has averaged an annualized gain of 10%, making it a low-risk way to add diversification to your portfolio.
Buffett may not be an aggressive buyer of stocks these days, but that doesn’t mean this top investor is leaving the market. You shouldn’t do that either. Like Buffett, remember to think long term and not worry about short-term moves. When you sell a stock, it shouldn’t be done out of panic, but for a good reason: perhaps you want to hold on to the gains, or switch to another investment that you think is more attractive.
Over your lifetime, you will invest in more than one bull market and one bear market, and you should not use these cycles solely as a reason to buy or sell.
Instead, during any market cycle, it’s important to follow Buffett’s advice to buy solid stocks at reasonable prices and hold them for the long term. This is how he achieved many of his victories over time. And this way you can also win as an investor: from now in 2024, until 2025 and beyond.
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Bank of America is an advertising partner of Motley Fool Money. Adria Cimino has no positions in the stocks mentioned. The Motley Fool holds positions in and recommends Apple, Bank of America and Berkshire Hathaway. The Motley Fool has a disclosure policy.
Warren Buffett’s warning to Wall Street has reached a deafening level: 3 things you need to do before 2025. was originally published by The Motley Fool
