If a Stock Market Crash Is Coming, History Says This 1 Investing Move Is Crucial

The S&P 500 index (SNPINDEX: ^GSPC) is on an incredible run. It put up total returns exceeding 17% in each of the past three calendar years. And in 2026, the total return so far has been 14% (as of Aug. 11).

This kind of stellar performance doesn't prevent investors from constantly thinking about the possibility of a stock market crash. Instead of sitting still, though, history says this one move is absolutely critical to be prepared for whatever comes.

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Reasons investors might be cautious today

To be clear, no one can accurately predict if or when a crash is coming. But should there be a correction (a 10% to 20% drop from the recent peak) or bear market (a fall of 20% or more) in the not-too-distant future, the best investors are taking a simple course of action. It's time to build up an adequate cash reserve. This will enable investors to be opportunistic enough to buy the dip.

But why might investors be worried today? There are some notable developments that support a less optimistic point of view right now.

Inflation is one. The personal consumption expenditures price index, which is the Federal Reserve's preferred inflation data point, was up a reported 3.7% in the month of June. This is well ahead of the central bank's 2% target, supporting the case that the fed funds rate shouldn't be lowered.

Tighter monetary policy, all else equal, doesn't stoke a bullish view among investors quite like the prospect of a more accommodative Fed would. This could get in the way of rising stock prices.

The market's valuation is also historically expensive. The cyclically adjusted price-to-earnings (CAPE) ratio is currently at 42.4. The last time it was this high was during the dot-com bubble era. Fidelity has done analytical work that shows difficult times might be coming. The firm's research indicates that when the CAPE multiple is above 40, investors can expect the S&P 500 index to generate negative annualized returns in the coming decade.

Artificial intelligence (AI) creates another point of fear, uncertainty, and doubt for the investment community. There are concerns that ongoing AI implementation by enterprises will negatively impact the labor market, leading to higher unemployment. This would lower incomes and spending power, pressuring revenue and profits for companies.

Another issue with AI relates to the massive amount of spending that's happening within the industry, which constitutes a rising portion of GDP. Any slowdown, due to mounting uncertainty about the AI payoff, can lead to falling stock prices for some of the most valuable businesses in the world. This can drag down the entire market.

Buying the dip leads to tremendous returns

If a crash is coming, it would make sense for investors to hold off on adding new money to their equity portfolios. Instead, the best move is to build a bigger cash position. This provides the necessary financial horsepower to take advantage of market weakness. History is crystal clear about what happens when investors buy the dip. Past results don't guarantee future returns, which goes without saying. However, it's impossible to argue with the data.

During the 12-month period following the day that the S&P 500 index entered its last correction on March 13, 2025, investors witnessed a 22% total return. Over the two-year time frame after the benchmark officially got into bear-market territory on June 13, 2022, the S&P 500 index produced a 50% total return. Investors who didn't put money to work lost out on these impressive gains.

The Vanguard S&P 500 ETF (NYSEMKT: VOO) is an excellent choice for investors who want exposure to the most popular stock market barometer. Its low expense ratio of 0.03% is hard to beat.

"Be greedy only when others are fearful," legendary investor Warren Buffett wrote in Berkshire Hathaway's 1986 shareholder letter. During a crash, everyone is scared. But those who make the effort to prepare put themselves in a position to play offense.

Neil Patel has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Berkshire Hathaway and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.