Buffett and Munger’s Portfolio Tips to Protect Your Investments From a Big Market Crash

Charlie Munger, the former Berkshire Hathaway vice chair who died in 2023, argued that investors must be prepared for a brutal reality: If you can’t stomach a 50% decline in your portfolio, you’ll never achieve exceptional results.

While many hope for an easy path to wealth, Munger’s rule remains one of the most straightforward and most challenging tests for anyone serious about investing in stocks over the long term.

The 50% Drop Test That Separates Winners From Losers

“You can argue that if you’re not willing to react with equanimity to a market price decline of 50% two or three times a century, you’re not fit to be a common shareholder, and you deserve the mediocre result you’re going to get,” Munger told the BBC in 2009. Facing such a huge drop is not just theoretical—during the 2008 financial crisis, Berkshire Hathaway’s shares lost more than half of their value, as did countless other high-quality companies. 

“A 50% drop isn’t fun, but it’s part of investing,” Taylor Kovar, a certified financial planner and CEO of 11 Financial, told Investopedia. “If you’re going to stick with it long enough to see real growth, you’ve got to be able to stay in when things get rough.” The rule is simple but forces investors to confront their true risk tolerance, especially during panicked markets.

Why Many Investors Fail Munger’s Brutal Standard

Historically, even the market’s strongest performers have faced deep declines. As Kovar explained, “Berkshire Hathaway, Amazon (AMZN), Apple (APPL)—all of them—have had 50% drops at one point. That doesn’t mean they were bad investments. It means the market goes through cycles.” 

Yet, most investors sell during these drops, locking in losses and missing the eventual rebound. Munger’s point: great investing means surviving temporary pain, trusting the fundamentals, and not being shaken out by volatility.

Preparation is everything. “We focus on a few basics,” Kovar said. “Make sure no single investment can wreck the whole plan. Keep some liquidity so there’s no pressure to sell at a bad time. And always have a plan in place before the market starts swinging.”  

Coaching on insights from behavioral finance can help investors keep perspective when the headlines get scary, Kovard said. He also noted that knowing when to ride out a drop versus when to cut losses comes down to fundamentals. “If the company still has strong leadership, a healthy balance sheet, and long-term potential, a drop could be a buying opportunity. But if something fundamental has changed…it might be time to move on,” Kovar said.

The Cost of Playing It Too Safe

Many investors, wary of volatility, opt for safer assets over stocks. However, over time, excessive caution can undermine wealth creation. Munger made his points because those who can’t endure declines tend to earn returns that fail to beat inflation or build meaningful long-term wealth.

Playing it safe may shield you from short-term pain, but it could also often mean settling for mediocrity and missing the market’s biggest recoveries.

Munger’s 50% drop rule isn’t just market wisdom; it’s a gut check that separates emotional investors from disciplined wealth builders. Historically, even the best companies have faced massive declines, and those who held on were rewarded with more gains.

Investors who prepare for market turmoil and build emotional resilience can better navigate the inevitable downturns and capitalize on better prospects for long-term growth.