If The Market Crashes, History Says Investors Who Do This 1 Thing Will Win Out

U.S. stocks went into freefall mode during the first quarter with the S&P 500 and Nasdaq Composite falling over 10%. Since, the markets have snapped back in a speedy fashion, pushing the benchmark indices back to near record highs, but the move has not been without bouts of volatility.

What is making the moves even more dicey is the market action is being driven by a concentration of factors: macro political tensions, AI fears, a Federal Reserve in limbo, and concerns about economic growth. For example, the latest jobs report showed employers added just 57,000 workers in June, way below what economists were forecasting. And inflation remains elevated, up over 4% on an annual basis as of May.

Despite the rebound in stocks, there are some indicators flashing caution. FinanceBuzz takes a look at how to check where you stand financially ahead of another downturn.

Flashing Caution?

Adding to market jitters are two indicators that are flashing caution. The Shiller CAPE (Cyclically Adjusted Price-to-Earnings Ratio) ratio, developed by Nobel Prize-winning Yale economist Robert Shiller, measures whether the stock market is overvalued or undervalued using stock prices, dividends, earnings, interest rates, and the consumer price index. It is currently trading above the 41 level, the second highest on record. The last time the index was in this territory was in 2000, around the peak of the dot-com frenzy.

Another metric, Warren Buffett's preferred measure of the markets, the "Buffett Indicator," which tracks the value of all publicly traded stocks to the country's gross domestic product, is at 214.08%, suggesting the market is overvalued.

While neither of these measures guarantees a market downturn, it's worth taking note and a good reminder to evaluate your investments and risk tolerance.

Stay the course or it could cost you

During times of steep market swings, those tempted to move money out of stocks should understand they're potentially setting themselves up to take a hit, according to Fidelity. Since 1988, in selloffs to the tune of 10% to 20%, which tend to occur every few years, investors who move to cash stand to miss the best five trading days when the market eventually rebounds, reducing potential future gains by an estimated 38%.

To be sure, the S&P 500 has averaged a return of 11% over the past 20 years through December 2025, the firm notes.

Quality matters

Warren Buffett, who retired from Berkshire Hathaway at the end of last year, has made billions investing in top brands and well-run companies, most of which are long-term holdings. His top four include Apple, American Express, Coca-Cola, and Bank of America, per Valuesider.

Investors like Buffett have made their millions by sticking to marquee companies that have solid businesses, turn a profit, and are run by savvy teams. Buffett is known to seek out "moat" companies, otherwise known as the very best in its field, dominating the competitors.

At the other end of the spectrum are those who chased easy money during the 2000 dot-com era. Hundreds of companies, such as online retailer Pets.com, who had the Sock Puppet as its cute mascot, collapsed and filed for bankruptcy shortly after its initial public offering.

An exception is Amazon. The online retailer, which at the time was not profitable, got whacked as contagion hit the tech sector, with its shares losing over 90% of their value. Still, it was able to manage inventory and cash flow while running an easy-to-use online retail site that was catching on, as studied by Harvard Business School. Since, the tech giant has grown into a powerhouse that now includes an expanded grocery arm due to the acquisition of Whole Foods and a growing AI and cloud arm, Amazon Web Services.

A $10,000 investment in Amazon in 2000 would today be worth over $600,000, a return of more than 6,000%.

Bottom line

Nobody has a crystal ball, not even the saviest of savvy Wall Street titans or hedge fund honchos. A market correction or bear market can come in fast. But those who are comfortable with how their portfolio is allocated can lower their financial stress rather than being forced into a scramble amid a downturn.

Everyone should stress-test their portfolio at least once a year. Make sure you know how your investments stack up, which companies or industries make up the big positions, and anything deemed too speculative should likely have a smaller position or no position at all.