Billionaire investor Warren Buffett is renowned for his discipline on stock valuations. He famously developed what has become known as the Buffett indicator, a simple ratio used to assess the U.S. stock market's value in relation to the country's economic production.
Buffett has warned in the past that crossing a ratio of 200% -- meaning stocks, measured by market cap, are worth twice as much as U.S. gross domestic production (GDP) -- is like playing with fire. Today, the Buffett indicator is at a blistering 225%! Alarm bells should be going off with deafening volume.
Nobody can predict what might come next, but investors can take some crucial steps to prepare for all scenarios. Here are four things to do right now as we head into 2026.
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1. Consider cashing in on some of your winners
The S&P 500 index has risen by nearly 16% over the past 12 months, and by 77% over the past three years. If it's been a while since you looked at the big picture in your portfolio, now is a great time to see whether stocks or market sectors have grown to outsize portions.
You don't have to sell out of your winners entirely, but it's never a bad idea to take some profit on an investment that has grown significantly, especially in a short amount of time. With the Buffett indicator screaming warning signals, the basic goal is to mitigate risk, and cashing in on some of your success during this bull market is part of doing that.
2. Look for diamonds in the rough
Just because the market indexes are near highs doesn't mean that all stocks are. If you do raise some capital or already have funds to deploy, it may be worthwhile to look for high-quality stocks that are currently out of favor. For instance, consumer staples stocks have dramatically lagged the market over the past year. That could mean bargains for some industry leaders within that space.
Other times, individual stocks fall for various reasons. Streaming giant Netflix has dropped 30% below its all-time high as drama swirls around its attempted blockbuster acquisition agreement with Warner Bros. Discovery. Stocks and market sectors constantly go in and out of style. Investors can find some fantastic deals on long-term winners if they're willing to look where the crowd isn't.
3. Stay optimistic about the future
If the stock market were a roller coaster, a bull market would represent that steady ascension to the top of the track. The plummet after reaching the peak? That would be how most bear markets feel. But remember that stock prices spend more time going up than they do going down.
Yes, the Buffett indicator is at a troublesome level. But if the stock market drops over the coming months, so what? Falling stock prices don't feel good in the moment, but they are in your best interest because they correlate to higher future investment returns.
Unless you are retired or soon to be, bear markets are wealth-building opportunities. Remember: The U.S. stock market has historically rebounded from every dip and crash, and it will likely continue to do so as long as American businesses grow and innovate.
4. Remind yourself to stay consistent
It can be tempting to try to time the market by waiting for that market crash before you swoop in and buy stocks at rock-bottom prices. Those who perfectly time market tops and bottoms are almost always lucky: It's the exception, rather than the rule. The data shows that trying to use market timing hurts your investment returns more than it helps.
Nobody knows for sure what the stock market will do next. It could crash, continue even higher, or trade sideways for years while economic growth catches up to stock valuations.
The best plan for most investors is dollar-cost averaging: steadily buying into stocks over time so that you build your portfolio brick by brick. No, you won't buy at the lowest possible price, but it's more important that you don't forgo crucial years that allow your investments to enjoy compound returns.
