Many people say to keep 10% of your portfolio as cash for market dips, but is this counterintuitive to the principle “time in the market beats timing the market”? Shouldn’t I have no cash left over except for my emergency fund?
This sentence right here is to meet the 250-character requirement for a post… 🙂↔️
Is there any reason to sideline cash?
byu/resemble4132 ininvesting
Posted by resemble4132
31 Comments
Holding cash is counter to the time in the market saying. But people are people. Do what you want and stop being concerned if other people do it differently.
> Many people say to keep 10% of your portfolio as cash for market dips
Many people say to be fully invested and not sit around waiting for dips.
Many people say a lot of different things.
Some people repeatedly say “Time in the market” because it’s the only thing they know about investing.
A portfolio of 90% stocks, 10% cash has a good risk-adjusted return, but you need to rebalance, not randomly buy or not buy stocks with some of your cash depending on your mood
Cash as an investment? No. I setup auto transfers monthly of what I can mentally handle, and I always pleased at the end of the year and several years later after doing that.
The reason to hold cash is for contingencies. You lose your job, you have an accident or for an unexpected medical bill. “Many” feel comfortable with 6-12 months worth of income in cash, which is generally long enough to find a new job. It’s safe play if you are fully invested otherwise, but it’s not an investment if it’s just sitting in a bank or cookie jar.
Warren Buffett thinks so and that’s good enough for me.
Let’s say you hold cash on the side (more than you reasonably need). How exactly would you decide when to buy anything? Any “dip” could be the start of a bigger dip (don’t buy because you can buy cheaper later) or a “fake” mini dip?
I have never seen “many people” recommend that. Most people recommend that you are fully invested and keep a cash buffer for emergency reasons, not to buy dips.
OP you must be talking about my emergency savings. If there is a large dip it’s an emergency for me to buy.
Only reason I keep cash is to sell puts
I learned it the hard way. When I have some cash lying around and I do an analysis and decide that an individual stock is worth investing in, I’m never going 100% ever again. Because even if you’ve identified what you think is a potential dip, you’re never gonna be fully accurate with it. The odds that you’re going to go 100% in on precisely the lowest of the dip are.. almost none. So I’m going to go ~50% from now on, and then add to it every day that it keeps dropping, 10% at first, then down to 5% a day.
I went into this one stock about a month ago after predicting some geopolitical factors are going to cause it to keep growing, then it crashed like 20%. The geopolitical reasoning is still solid, the dip is temporary, and I’ve got no cash left to buy more to drive my average down. It hurts 😀
I think when people say not to time the market, it has more to do with people who think they know when to pull everything out of the market and then miss a big run up. in my opinion, holding some cash to buy on a dip is not “timing the market”.
It will be timing the market if you invest that cash in a dip. Your emergency fund is separate from investments. As to how large it needs to be is a matter of your personal risk tolerance.
I like to keep some around for really rainy days.
Everybody has their own risk tolerance… What I do as I wait for this S&P 500 or any of my other major ETFs to drop by one percent or more and then I buy increments of $1000 based on what percentage it drops… So for example, if SPY drops 2% today, I’m gonna buy $2000 worth if it drops 3% tomorrow I’m buying $3,000. So yes, I have cash on the sidelines, but I deploy it the second that it drops at least one percent in my major ETF.
I’ve thought this a lot and am essentially all in all the time. I think the better option is to have some money in a much safer asset that resists market drops (april 25). Then you rotate that money into the red securities.
Do you agree with the said principle?
If you do, dont leave out any cash.
If you don’t, leave some cash and time the market, buy some dips.
Yes, those are two different investing philosophies
If you want to buy dips, watch a volatile stock for a while to see how it behaves during different external events affecting the market. It will give you some indication of its range, and then you’ll have a reasonably safe entry point. It’s still gambling, but I like to allocate a small portion of my portfolio for yolos, memes, and momentum plays.
I bought RKLB in the $4 range because I heard someone on a podcast say that Peter Beck was the smartest guy in rocket science, and it turned into a meaningful percentage of my account. Then I started paying attention to it and buying it when there were large pullbacks in price.
If you are working and young, it makes sense to only hold a small amount of cash for emergencies.
If you are older and either nearing retirement or retired, then it makes sense to keep some amount of your savings in either cash, bonds, or other liquid form that will not likely crash in value if the market has a crash. That way you will not have to sell stocks in a down turn, thus avoiding locking in large losses. During covid, I have some bonds, and when my stocks crashed 30-40%, I was able to sell some bonds at a 10-20% gain, and move that money to stocks, where it rebounded a year later and brough me a profit.
Had I been retired, I would have done less, other than to sell bonds or SGOV in order to get my withdraws funded. That way I would not have to sell stocks at a loss.
Always keep some cash to strike.
It depends what you are investing in. Index funds probably very little in cash, individual stocks, more cash
The problem isn’t the 10% cash, it’s the waiting for a dip part. That’s not a strategy, it’s changing your allocation based on feels and that’s unpredictable. 10% in an uncorrelated asset class can give you a much better risk adjusted return with almost no reduction in absolute return as long as you rebalance to maintain that 10%. Context is also super important, talk about allocations is usually from the point of view that you’re talking specifically about savings for goals with a long time frame so if you include nearer term goals of course the allocation will be more conservative. Also cash equivalents have had better short term returns recently so the people giving you the impression you should keep 10% on the sidelines could have been talking about like 10 different rational things, or they could just be wrongly pushing for timing the market because they think they’re special.
It’s an opportunity cost. The cash on the sidelines is not invested, and loses out on all market gains. Even if you buy the dip, there’s no guarantee you make more money than if you just lump-summed the entire amount right away.
Timing the market *might* yield higher returns, but then you are relying on luck and your ability to make the perfect trade at the perfect time. I prefer just investing everything and not thinking about it.
Keeping 10% in cash is like keeping snacks on a road trip – you hope you won’t need them, but when things go bad, you’re very glad you didn’t go all-in on gas.😄
Holding cash isn’t just about timing the market or just about an emergency fund. It’s also about other opportunities outside the equity market.
I have been holding $100k in HYSA looking at vacation investment properties. Sure, I could have invested it and it would have done better than 3%, but I didn’t know that at the time. And if we had a 20% dip I would have either had less money, or would have sold at a loss.
Now with that, I haven’t found anything so I bought an extra $10,000 on the recent dip. I wans’t chasing a dip, just the vacation real estate market has been flat so there’s no urgency to buy anything and I haven’t found anything I like.
TLDR sometimes holding cash is about your overall financial goals.
It really depends what you are trying to do. A lot of funds have large cash reserves if they are trading derivatives so they don’t get margin called. But it doesn’t really make sense if you’re not doing that.
Depends on where you are in life. As you get close to retirement you want to reduce your exposure to fluctuations in the market, but you don’t want to abandoned the potential up sides.
If one is an adherent of Capital Asset Pricing Model (CAPM), then the optimal risk-reward will include a mix of risk-free Treasury bills (very close to cash) and a collection of diversified stocks (S&P 500).
SGOV ETF would provide near immediate liquidity and extremely low risk with very modest returns. It is common for investment portfolios to have a 60/40 mix (or greater) between stocks/bonds as to reduce the portfolio volatility. This is especially true when approaching a time horizon when funds are needed (college tuition, retirement, home purchase, etc.).
So you don’t sell any of your holdings when the market inevitably takes a hard hit.