When Cash Is a Position, Not a Mistake

Every portfolio manager has heard it: "Cash is trash." "You can't beat the market sitting in money market funds." "Clients pay you to be invested, not to hold cash."

These critiques miss something fundamental. Cash is not always the refuge of the indecisive or the coward. Sometimes it is the most deliberate position you can take.

The challenge is distinguishing between strategic cash allocation—what we call "dry powder"—and indecision masquerading as patience. After managing portfolios through three distinct market cycles, we have learned that this distinction matters more than most practitioners admit. The difference shows up not in your quarterly letters but in your five-year track record.

Why Cash Feels Wrong

The industry conditions you to think cash is failure. Your benchmark is fully invested. Your peer group average is 98% deployed. Your performance attribution report highlights cash as a drag on returns during the bull market everyone just experienced.

When markets rise 20%, your 10% cash position costs you 200 basis points of relative performance. That is not subtle. Your clients notice. Your consultant notices. You notice.

The incentive structure pushes you toward full investment. Career risk tilts heavily against holding cash. It is far easier to lose money in a stock everyone owns than to forgo gains by holding cash no one thinks you need.

But this framing assumes markets always offer reasonable opportunities. They do not.

Strategic Cash vs Indecision

Strategic cash means you have evaluated current opportunities, assessed their risk-reward, and concluded that the expected return does not compensate you for the risk. You are not waiting for perfect clarity—that never comes. You are waiting for acceptable odds.

Indecision looks similar on the surface. You hold cash. You are not buying. But the internal process differs. With indecision, you cannot articulate what would make you invest. You are vaguely uncomfortable but have no framework for when that discomfort should trigger action.

We test this with a simple question: If someone handed you a new $10 million mandate today, would you deploy it into your current opportunity set within two weeks? If yes, you are indecisive—you should be buying in your existing portfolios. If no, you likely have a legitimate reason for holding cash.

The market does not care about your mandate timing. If the opportunities are not there, they are not there.

How Much Cash Drag Is Acceptable

This depends entirely on your mandate and your conviction. A long-only mutual fund with a concentrated strategy has more room for cash than a closet indexer. If you run 25 names and own your conviction, 15-20% cash during stretched valuations is defensible. If you run 80 names that track your benchmark, 5% cash is already pushing it.

We think about it in terms of opportunity cost versus optionality. Cash costs you the market return. That is the opportunity cost, and it is real. But cash gives you optionality—the ability to act when others cannot.

During the 2020 March Covid panic, portfolios with 15% cash could buy aggressively. They bought airlines at $20, hotels at half-book, retailers trading like they were going bankrupt. Fully invested portfolios could only watch or sell winners to buy losers, which introduces a different risk.

During 2021's everything-rally, that same cash position hurt. A lot. Relative performance suffered. Clients questioned. But the optionality remained valuable because the opportunity set had not improved—it had deteriorated. More cash felt appropriate, not less.

The acceptable level of drag relates directly to the quality of available opportunities and your time horizon for being proven right. If you think normalization takes 18 months, 10% cash drag is manageable. If you think it takes five years, you are probably wrong about the market environment.

When Cash Is the Right Call

We have held elevated cash in three distinct environments.

First, when valuations reach levels historically associated with poor forward returns. Not expensive by last year's standards—expensive by 30-year standards. In late 2021, the median S&P 500 stock traded at valuations above the 2000 tech bubble. That is not a timing call. That is an observation about expected returns.

Second, when your existing portfolio is fully valued but you see nothing to buy. You do not sell good businesses just to "rotate into better opportunities" if better opportunities do not exist. You sell good businesses when they reach your assessment of fair value, and sometimes that capital has nowhere to go. That is fine.

Third, when market structure feels unstable. This is the hardest to quantify but shows up in strange price action, extreme correlations, or leverage indicators that suggest fragility. March 2020 was obvious in hindsight. August 2024's yen carry trade unwind was less obvious. But both created environments where liquidity mattered.

Cash does not solve these problems. But it gives you options when others are forced sellers.

The Client Conversation

Clients do not naturally understand strategic cash. They hear "cash position" and think you are not doing your job. This is where communication matters.

We explain it simply: "We are paid to generate returns, not to be fully invested. Right now, we see more risk than opportunity in adding new positions. We would rather accept short-term cash drag than permanent capital loss from buying expensive businesses."

Then we get specific. We show them the valuation work. We show them what we are watching. We show them what would trigger deployment. This is not market timing—it is risk management.

Some clients push back. That is fine. The alternative—buying low-conviction names just to deploy cash—creates a different problem. You end up owning 30 stocks you do not believe in, and when the correction comes, you are still fully invested in mediocrity.

We would rather explain cash drag during a bull market than explain permanent impairment during a correction.

The Behavioral Discipline

Holding cash takes more discipline than people think. Every day the market rises, you feel stupider. Every positive headline reinforces that you are wrong. Your peers are making money. You are not.

This is where process helps. We review our cash position monthly with the same rigor we review individual holdings. Is the opportunity set better or worse than 30 days ago? Have any of our watch-list names reached attractive entry points? Has market structure changed in ways that reduce the value of optionality?

If the answers suggest deploying cash, we deploy it. If they do not, we hold. The discipline is in asking the questions, not in maintaining any particular cash level.

The other discipline is spending the cash when opportunities arrive. Some managers hoard cash like Smaug hoarding gold. They never find the "perfect" opportunity. The portfolio drifts to 30% cash and stays there through multiple cycles. That is indecision, not strategy.

Strategic cash gets deployed. Maybe not in one week, maybe not even in one quarter. But it gets deployed when the risk-reward improves. If you cannot identify what would trigger deployment, you are probably just scared.

The Practical Framework

Here is how we think about it operationally:

Under 5% cash: Normal course rebalancing and liquidity buffer. This is not a position—it is portfolio mechanics.

5-10% cash: We are finding less to buy than we expected but have not concluded opportunities are scarce. This range happens naturally when selling discipline meets a lack of new ideas.

10-20% cash: Deliberate positioning. We have concluded the opportunity set is poor relative to risk. We can articulate what we are waiting for. We have updated clients. This is strategic.

Above 20% cash: Extremely rare. This has happened twice in 20 years—once before the 2008 financial crisis, once in late 2021. Both times, the portfolio was fully valued, valuations were extreme, and we saw nothing worth buying. Both times, we were early. Both times, the optionality proved valuable.

The levels matter less than the reasoning. You need to know why you hold the cash and what would make you deploy it. Without that clarity, you are guessing.

When You Get It Wrong

You will get it wrong. Sometimes you hold cash and the market runs another 30%. Sometimes you deploy too early and watch your "bargains" get cheaper. The question is not whether you make mistakes—it is whether the framework improves your long-term results.

We have held strategic cash and been wrong about the timing. We built 15% cash in 2019, expecting a recession that did not arrive until Covid. We cost clients 18 months of opportunity cost. But when March 2020 hit, we deployed aggressively and captured the recovery.

We have also deployed too early. We bought energy stocks in 2015 thinking oil had bottomed. It had not. We added more in 2016. Still wrong. By 2017, we questioned our entire thesis. By 2020, those positions were under water. Then 2021-2022 happened, and they became the best performers in the portfolio.

Strategic cash is not about perfect timing. It is about ensuring you have capital available when market dislocations create genuine opportunities. That requires accepting periods when you look stupid for holding cash and periods when you look stupid for deploying it too early.

What it prevents is looking stupid because you owned 90 expensive stocks when the market repriced.

Cash as a Position

Cash is not the absence of a decision. It is a decision. The decision is: Given current opportunities and their risk-reward, I prefer optionality over deployment.

That is a legitimate investment position. It has a cost—opportunity cost. It has a benefit—optionality. Whether it makes sense depends on your assessment of the opportunity set and your portfolio's existing positioning.

The market will punish you for holding cash during bull markets. Your benchmark will beat you. Your peers may beat you. Your clients will question you. This is the price of optionality.

But over full market cycles, strategic cash improves results for portfolios that use it correctly. Not because you time the market—you will not. But because you avoid buying poor opportunities at high prices and retain capital for buying good opportunities at reasonable prices.

The discipline is distinguishing between strategic cash and indecision. The framework is knowing what would trigger deployment. The courage is accepting short-term underperformance for long-term positioning.

Cash is not trash. Sometimes it is the most valuable position you can hold.