If a Bear Market Is Coming, This Is Warren Buffett's Golden Rule for Preparing Your Investments

Investors can learn a lot from Warren Buffett. His time leading Berkshire Hathaway spanned several decades, so he has experienced many different kinds of economic and market environments that aided in his mastery. This gives the Oracle of Omaha perhaps the most comprehensive understanding of how to navigate various situations.

There's a lot of talk these days about a looming bear market. Pessimists think that the S&P 500 index is due for a reset, especially since the benchmark has soared 258% in the past 10 years (as of Sept. 30). There are concerns surrounding equity valuations, inflation, and the state of the economic backdrop.

While no one knows when the next bear market will come, it's always a good idea to figure out how to be ready when one does eventually surprise investors. This is Warren Buffett's golden rule for preparing your portfolio in case stock prices take a turn for the worse.

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Know what you own

Bear markets officially happen when the S&P 500 index, or any other financial instrument, drops 20% from a previous record high. According to research from Hartford Funds, these markets have occurred on average around every five years since 1945. They are more common than you might have realized. However, it can be scary living through one.

That's why it's so important to follow Warren Buffett's core philosophy. His extraordinary investing success is a direct result of thoroughly understanding the companies that he owns. This is known as a circle of competence. He is extremely disciplined about not venturing outside of this domain.

As an extreme scenario, let's imagine that the stock market tanks 20% tomorrow. The first reaction from investors would likely be to sell their holdings to avoid further losses. However, if you know what you own and remember why you bought these businesses in the first place, it can help recalibrate your perspective.

Additionally, you'll be able to accurately assess whether the theses for the stocks in question have broken, or if they still hold up. In the latter case, it's time to seriously consider adding more cash to the portfolio in order to buy these companies at much more attractive valuations.

Conduct this exercise before an actual bear market starts. Look at all of the stocks you own. Be honest with yourself, and question whether you really understand these businesses. The checklist can include how they make money, what key products and services they sell, who the customers are, competitive advantages, opportunities, threats, financials, valuation, and management.

Having a firm grasp of these concepts will turn your focus more on the fundamentals and less on stock prices. This is how you successfully navigate bear markets.

The stock market can keep climbing higher

The S&P 500 index has risen by 12% through the first nine months of 2026. If this gain holds up over the next three months, the benchmark will have posted double-digit increases in four consecutive years. Credit goes to the artificial intelligence boom, which has propelled some of the world's most valuable companies.

It's hard to ignore the market's valuation, though. The S&P 500 index currently carries a cyclically adjusted price-to-earnings ratio of 41.1, close to the highest level ever (it was only more expensive during the dot-com bubble era). Add this to uncertainty about the economy, and some investors are waiting for things to get ugly.

There's nothing that says the stock market can't keep climbing higher. Earnings growth, the most important catalyst for stock returns, has been above average for the S&P 500 index, and profit margins have never been higher.

This just means that investors shouldn't try to time the situation. Being able to hold your positions through the inevitable ups and downs is what separates mediocre capital allocators from great ones. This is precisely how Warren Buffett has operated.

Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.