With inflation, interest rates, and valuations all posing risks, the S&P 500 is vulnerable to a correction.
But trying to predict a crash can actually do damage to your portfolio.
There's a better way to protect your portfolio than moving everything into cash.
What if I told you that the biggest risk from the next market crash isn't the crash itself? It might be what investors do to their portfolios to try to avoid the crash.
In today's economic environment, there are legitimate reasons for concern. Inflation is high. Oil prices have soared. Interest rates are on the rise. The Shiller CAPE ratio, which measures stock prices relative to inflation-adjusted earnings over the past 10 years, is at its second-highest level of all time.
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But selling stocks and moving to cash to avoid the decline creates a whole new set of problems. First, you have to be correct in your prediction that a crash is coming and the timing of it. Second, you have to decide when the right time is to get back into stocks (and have the actual discipline to do it).
I'd rather own an ETF that gives me the confidence to remain invested in stocks through the crash.
Image source: Getty Images.
The ETF I'd choose to own if I were trying to anticipate a market crash is the iShares MSCI USA Quality Factor ETF (NYSEMKT: QUAL).
It's built around stocks that demonstrate three fundamental characteristics: higher return on equity (ROE), stable earnings growth, and low financial leverage. That combination creates a portfolio with high balance sheet quality and the flexibility to continue growing the business through tough times.
The interesting part is that the iShares MSCI USA Quality Factor ETF isn't just loaded up with healthcare and consumer staples stocks. Since it focuses on the individual companies, it still has a 39% allocation to tech, including higher exposures to names like Nvidia, Apple, and Microsoft.
That seems counterintuitive to position yourself that way for crash protection. But these are the companies currently delivering some of the biggest revenue and earnings growth. They're among the fund's top 10 holdings for a good reason.
The biggest advantage of investing in quality stocks is that it allows you to maintain your long-term equity allocation while tilting your portfolio toward durability.
You don't have to try to predict a crash and risk damaging your long-term returns if you're wrong. And if a crash doesn't come, you're still invested in equities and enjoy equity market upside.
Bear markets are normal and the price of admission for investing in stocks long term. But over the years and decades, the stock market has recovered each time and eventually reached new highs.
Instead of preparing to get out of stocks, the best course of action is to prepare yourself to stay in them.
Before you buy stock in iShares Trust - iShares Msci Usa Quality Factor ETF, consider this:
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David Dierking has positions in Apple. The Motley Fool has positions in and recommends Apple, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.