How to think about cash as a stock investor.

1/10

Here, I'm NOT talking about:
1) Your cash safety net (you should have one!)
2) Using cash/ST bonds vs. low-yielding LT bonds for asset allocation purposes

I'm talking about excess cash you're purposely holding instead of investing it in the stock market

2/10

The opportunity cost is the same whether you think of excess cash as "dry powder" (waiting for opportunistic deals) or "market timing" (waiting for a market dip to buy).

3/10

Since there's scant evidence anyone can time the market over the long term (vs. getting lucky), our best approximation of opportunity cost is the difference between the market's historical return (~10%) and cash's return (<1%).

4/10

We can think of that 9% yearly delta as an interest rate we're being charged by the market for the safety of cash.

That's a HIGH hurdle!

5/10

Three examples of when it may be worth it to forego 9% to hold cash...

6/10

1) When a little cash helps us stay invested in the stock market with the rest.

E.g. Holding 5% of dry powder is a GREAT investment regardless of outcome if it mentally allows us to keep the other 95% of our stock-market-eligible money perma-invested.

7/10

2) If you're such an amazing AND disciplined investor that you can overcome the 9% vig with opportunistic stock buys.

Seth Klarman and Warren Buffett fall into this bucket.

VERY hard to execute. People often hold cash until FOMO gets the best of them and they buy high.

8/10

3) When we come into a large lump sum, it can make sense to add it to the market over time...essentially dollar-cost averaging as many of us do with biweekly paychecks into a 401k.

9/10

Outside of these specific examples, holding stock market money as cash is just gambling on market timing.

The old phrase "Time IN the market, not timing the market" holds true.

10/10