August was a month of records…

The S&P 500 hit an all-time high. The Nasdaq crossed 8,000 for the first time – and also hit a new all-time high. Apple (Nasdaq: AAPL) became the first company to reach a market cap of $1 trillion. And Amazon (Nasdaq: AMZN) soon followed.

There has been plenty of other good news lately as well.

Of the 486 companies in the S&P 500, 386 beat second quarter earnings estimates. Second quarter GDP growth was revised upward to 4.2%. Job creation is still strong. And minority unemployment is at an all-time low.

As a result, the market – which bottomed on March 6, 2009, in the midst of the financial crisis – has been rising for 9 1/2 years now. The S&P 500, including dividends, is up 423%. Small cap stocks are up even more.

Needless to say, the two most frequent questions I get asked by readers these days are 1) How much higher can this market go? and 2) Is it time to go to cash?

Both questions are easy.

How much higher can this market go? A lot.

Is it time to go to cash? No.

I’ll concede that while the market will ultimately go a lot higher, “a lot” can also happen in the meantime.

Like a significant correction. Or a full-fledged bear market.

But that wouldn’t be the end of the world – or even a particularly big deal.

A bear market follows every bull market. Just as a bull market follows every bear market.

For more than two centuries, the history of the market has been higher highs and higher lows.

So don’t fear bear markets. However, you should certainly prepare for them.

How? By spreading your risk among different asset classes (like stocks, bonds and cash) – and rebalancing once a year. By diversifying broadly among a wide selection of securities. By following our position sizing strategy. (Never invest more than 4% of your equity portfolio in a single stock.) And by running trailing stops behind each stock, ensuring that you cut your losses and let your profits run.

Follow these four basic steps and you’ll be well-prepared when the next bear market unexpectedly shows up – as it always does.

Wouldn’t it be safer to simply move into cash and then back into stocks after the sell-off?

Notice what has happened to investors who tried this over the last nine years.

They’ve been left standing at the station while the great bull train sped on without them. Having missed a rally of historic proportions, they’re now afraid to get in for fear of being clobbered during the next sell-off.

That’s the problem with trying to time the market. Miss a major move up and you’re faced with two unattractive scenarios:

  • If you stay on the sidelines, the market could continue moving up without you.
  • If you get in after missing all that upside, the market could suddenly shift into reverse.

Peter Lynch, the greatest mutual fund manager of all time, famously said, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in the corrections themselves.”

Likewise, Berkshire Hathaway CEO Warren Buffett told CNBC co-anchor Becky Quick last week that he is still buying stocks. In fact, he has bought them every quarter since March 11, 1942.

He confessed that some of his purchases weren’t particularly well-timed, adding, “I don’t know when to buy stocks, but I know whether to buy stocks.”

This optimistic philosophy has served him well. Buffett is the world’s third-richest man, with a net worth of approximately $80 billion.

However, for Oxford Club Members and other investors who have made a boatload of money over the past decade, it isn’t a bad time to do a bit of intelligent pruning in your portfolio.

And in my next column, we’ll discuss exactly how to do it.

Good investing,