As we discussed last week, market crashes (defined as drops of 30 percent or more) have become more common recently, while the smaller declines known as bear markets (drops of about 20 percent) have become less so. With two major crashes in the past 10 years, it seems like a good idea to examine some of the factors that preceded them.

Are there any warning signs that we should be keeping an eye out for?

Yesterday, we talked about the latest prediction of doom—this time, a 67-percent decline in the stock market in the next 18 to 24 months. Unlike most doom-saying, which isn’t supported by any actual data (the collapse of the dollar, for example), arguments for a significant market decline are based on a number of very real facts, many of which I’ve discussed in the past.

I've never really examined the situation of a crash itself, however. What would a crash mean, and how would it likely play out?

Yesterday, I received a question from Joe Esposito that touches on some very relevant demographic-related issues:

“How do you feel about Harry Dent's prediction of a Dow 5,500 and the next big crash starting within the next 24 months or so? Just curious on your take regarding his demographic viewpoints and positioning with booms and busts. (Highs are higher and busts will be lower than that last.) Thoughts?”

Following up on yesterday’s post, I want to look at two areas of the investment world that have a lot to say about how we invest our money—and how we make our profits.

When I go on vacation, I do so with the expectation that something will happen that makes me (almost) want to be back in the office.

Sure enough, while I was out last week, the market proceeded to sell off in a way that has become pretty uncommon recently, generating fear and worry.

In Thursday’s post, I recommended slowly prepaying your mortgage as one way to put your money to work effectively. I also mentioned that people tend to underestimate the value of cash. Today, I want to delve into that a bit more, by comparing how sitting on cash stacks up with investing in bonds or stocks in the current environment.

The dilemma many investors face, when looking at today’s markets, is simple: Where can I put my money? Markets are overvalued, and bonds sure look like a bubble, but I have to do something with the cash. I can’t just let it sit there, right?

I get it, but I don’t necessarily agree that you need to do something. Many great investors see sitting on their hands when market conditions are unfavorable as a key to their success. In poker, you make your money by not betting on bad hands. The value of the optionality associated with cash is, in my opinion, underrated.

In the past 24 hours, I’ve had several discussions that centered on the question “What do we do now?” During one, on Fox Business News yesterday afternoon, the anchor pointed out that, even as I was cautious on equities, the market had climbed a wall of worry all year—and looked likely to continue to do so. Does that make caution on equities wrong? Similarly, I was talking with a Wall Street Journal reporter this morning about where the market was going, and we got into the continuing government confrontation, earnings, and the real economy—all without coming to any real conclusions.

First things first: The fact that the market keeps going up doesn’t mean everything is all right. Under that standard, the housing market was perfectly fine in 2007, so I don’t think the fact that the market is rising means caution is inappropriate.

My wife, Nora, is a gadget freak. She had (and used) a PalmPilot. She is all over her iPhone. She used her MacBook Air laptop so much and so effectively that I ended up getting one as well. She has a TDI Clean Diesel VW and optimizes her mileage with the way she drives.