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Why you should always hold cash for when the market falls

With interest rates having been stuck at just 2.5% for some time now, the smart investors have turned towards the stock market for superior returns. Of course, this has proven to have been an incredibly profitable move with the Aussie market having soared to a fresh multi-year high recently.

However, while it can certainly be tempting to throw all your money into the stock market, it is important to not fall into that investing trap.

Sure, history has proven shares to be one of the most profitable investment classes over the decades, but they can fall just as hard. Just look at the period between 2007 and 2009 as a perfect example. Investors who pumped all their money into the market watched their wealth diminish almost 55%. And there’s a good chance they still wouldn’t have recovered their losses.

While the local market has dipped 2.2% in the last few trading sessions, there have been murmurs of a stockmarket crash lurking just around the corner.

Don’t fall for the same trap as so many other investors and become too comfortable in shares – a correction or a crash will come – it’s literally just a matter of when and how big it will be.

Before that happens, ensure you have a strong reserve of cash built up. Not only will this protect your overall wealth from declining too heavily as the market tumbles, it will also give you a prime opportunity to buy shares when they are trading at extremely discounted prices (more on that below).

While other investors are running in fear, I know I’ll be licking my lips at the bargains I’ll be getting. In particular, I’ll be watching for even further price slides for companies like Coca-Cola Amatil Ltd (ASX: CCL) and XERO FPO NZ (ASX: XRO), while I would also love to buy shares in Telstra Corporation Ltd (ASX: TLS) should they pull back in price.

Your chance to start building a $1 MILLION portfolio

There’s no denying that market wobbles can be downright scary at times – watching your portfolio plunge in value is never a nice experience. But these market drops can also be the greatest time to start building your personal fortune by buying stocks at their cheapest, and then letting them compound in value over the long-run.

If you're ready to start building your wealth by investing in the best ASX shares then don't miss The Motley Fool's brand-new FREE guide, "Your 10 Step Guide to Making $1 Million in the Market". This new, free report contains every detail you need to know now to build your personal fortune! Simply click here to secure your FREE copy.

Motley Fool contributor Ryan Newman owns shares in Coca-Cola Amatil Ltd. The Motley Fool owns shares in XERO FPO NZ.

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