Preparing for the Worst: Building Cash Reserves in a Rising Market
The S&P 500 index has been on an incredible run, posting total returns exceeding 17% in each of the past three calendar years. However, investors are still concerned about a potential stock market crash.
One notable development supporting this cautious view is inflation, which rose to 3.7% in June, far above the Federal Reserve's 2% target. This could lead to tighter monetary policy and stifle rising stock prices.
The market's valuation is also historically expensive, with a cyclically adjusted price-to-earnings (CAPE) ratio of 42.4, last seen during the dot-com bubble era.
Artificial intelligence is another point of concern, as its implementation by enterprises could negatively impact the labor market and lead to higher unemployment.
To prepare for a potential crash, investors are advised to build up an adequate cash reserve to buy the dip when it happens. History shows that this strategy can be lucrative, with a 22% total return in the 12 months following the last correction and a 50% total return over two years after entering bear-market territory.