Cash is a drag on your portfolio BUT it has a hidden embedded option value.

Cash is a drag on your portfolio, says the conventional wisdom.  Its returns are low and often negative after inflation and taxes.

But cash has a hidden embedded option value.  When markets crash, cash is king.  All of a sudden assets that were being traded at 5 and 10 times the money spent to build them can be had for a fraction of their replacement cost.

Highly leveraged competitors go bankrupt, leaving the field free for the cash-rich company.

Banks won't lend money except to people who don't need it  - such as the companies with AAA credit ratings and people with piles of money in the bank.

In times like these the marketplace is dominated by forced sellers who must turn assets into cash regardless of price.  This is when the investor who has protected his portfolio by being cash-rich is rewarded in spades:  people will literally be beating a path to his door to all but give away what they have in return for just a little bit of that scarce commodity called cash.


Additional note:
Buffett always has cash in Berkshire Hathaway.  In 2008 Global Financial Crisis, many companies approached Buffett as he has plenty of cash which they sought to have badly.

Cash in a Clunker

Stock has moved up higher by 50% the last few months. Many who cashed out of the market during the downturn are paralysed. Some termed them as "paralysed investors".

However, cash is a clunker. Cash is earning nothing and its value is eroded by inflation. Also, the US dollar has fallen 20% in value relative to most other currencies. Moreover, when one is using one's cash savings, one is effectively dipping into or spending your capital.

There is always uncertainties in the market. Should you get in now? Why? You might be missing on more upsides. Should you get out now? Why? You might the miss a sell off, after all the market has risen 50% over the recent months. Perhaps, should you be selling out on some of your stocks? Why? To lock in some gains on stocks that have risen above "intrinsic" value.

Few months ago, shares were being sold at WHOLESALE PRICES. Now they are selling at RETAIL PRICES. Effectively, those "paralysed investors" who will be entering the market at this time are paying retail prices for their shares. How then can they re-employ some capitals into stocks? How can they get back into stocks?

Stay with high quality high dividend yield stocks which are likely to grow their dividend over time. Then start an investment program to buy into these on a systematic basis over time, for example, over the next 10 months. This is akin to cost averaging. As long as you stay with high quality high dividend yield stocks, even if the market were to have another sell down, these stocks should be quite resilient and the selldown may even be a good opportunity to buy at cheaper prices. More importantly, is by having an investment program in place, one can regain one's confidence to invest back into stocks; getting out of cash which is earning next to nothing at present.

The market is unpredictable. The less productive question to ask of oneself is "Is the market going down tomorrow?". The more productive and appropriate question is "Where will the market be in 3 or 5 years from today?"