BUILDING CASH IN PREPARATION FOR STOCK MARKET CORRECTION

The stock market has been on a roll lately and sometimes when this happens, it's easy to forget that this will not always be the case.  Eventually we'll be faced with another correction.  When will it happen and how severe will it be?  I have no way of knowing, but in my experience, it's sure to happen.  Given that the bull market is already a bit long in the tooth, I'm thinking it will be sooner than later.  I read an interesting article today which pointed out that historically, there was a slump in the market for the first year or two after every U.S. presidential election.  This was regardless of which party won the presidency.  So while I'm a big believer in re-investing dividends, with the prices being so high right now and a possible correction looming in the not to distant future, I believe it would be prudent to put build up the cash portion of my portfolio.  This will allow me to take advantage of bargain prices when the stock market drops.  While I won't earn a significant amount of interest on the cash, I will earn some and it will help insulate my investments from a correction.

While I had already diverted dividends to cash because of the run up in stock prices, I'd planned on doing this only on a short term basis.  Now I might be looking at several months, or even a year or more.  I'll miss out on some compounding from reinvesting the dividends, but I think I'll more than make up for it by getting better prices on the future stock purchases.  This does not mean that I won't be buying any stocks at all.  I've got my 401k kicking in at work and I'll be making purchases for my IRA and my Roth accounts.  Cash investments will keep dividend income growing and dividend payouts will build up the cash portion of my portfolio.  Of course I guess I could just save the cash and keep reinvesting dividends, but I think I'll stick with what I've already set up.  Time will tell whether this was a wise choice or not.