Should You Wait for a Crash to Invest? (The Cost of Sitting in Cash)

Transcript

On this episode of the Personal Finance Podcast, should you wait for a crash to invest?

Oh, what's up everybody, and welcome to the Personal Finance Podcast. I'm your host, Andrew, founder of MasterMoney.co. And today on the Personal Finance Podcast, we're gonna be talking about should you keep your money in cash and wait for a pullback or a crash? And we're gonna talk about today in this episode the cost of sitting in cash.

If you guys have any questions, make sure you join the Master Money newsletter by going to MasterMoney.co/newsletter, and you can respond to any of those newsletters every single week and ask your question. And don't forget to follow us on Apple Podcasts, Spotify, YouTube, or whatever podcast player you love listening to this podcast on.

And if you wanna help out the show, consider leaving a five-star rating and review on Apple Podcasts, Spotify, or your favorite podcast player. Now today, we're gonna be talking about should you keep your money in cash and wait for the market to pull back? This is one of the most common questions I get from investors, is they say, "Hey, should I keep some of my cash on the sidelines, or should I keep some money on the side for when the market pulls back?

Warren Buffett does it. I see all these other big investors do it. Maybe I should do the same thing." And this is one of the most common reasons why people decide to delay investing, is because they feel as though the market is high And I'm gonna tell you something right now. When I was young, and I was a young investor, I thought every single year the market was at an all-time high and there was gonna be some sort of pullback at some given time.

I thought this about the real estate market. I thought this about the stock market. But then I realized pretty quickly that I would see all these different people on CNBC, and they decided to make these predictions. Or I would see all these different people trying to make these predictions about the housing market.

And the longer that someone waits, the longer that someone was waiting to invest their dollars, the worse their situation could have gotten, whether they were waiting on to invest in real estate or they were waiting to invest in the stock market. And what happens a lot of times is you hear that stocks are at all-time highs, or we're in some sort of a bubble, or we need to make sure that we are protecting our money, so we need to move it over into cash.

And the problem with this is, sure, I'm gonna be the first one to tell you right now, there's a crash coming. There's a recession coming. But none of us have any idea when that's going to happen. And if someone tells you they know when that next crash is coming or they know when that next recession is coming, you need to write that person off.

Robert Kiyosaki, the guy who is famous for writing Rich Dad Poor Dad, literally tells you there's a recession coming every single month over and over and over again. And then when there is some sort of pullback, then he said, "I told you so." But he's literally just constantly predicting these recessions over and over again.

And if you were to listen to that advice, you would have been way worse off financially than just keeping your dollars invested. You could see Jim Cramer is a great example of this on CNBC, always stating that a stock is gonna go up or a stock is gonna go down. Now, he doesn't have bad intentions typically.

A lot of times he is just trying to predict what the market is gonna do or what the stock is gonna do, and that's what he gets paid to do. But what I want you to realize here today in this episode, that you cannot control what the market does. Nobody understands what direction the market is gonna go.

Sure, there are economic indicators that can help us decide some of this stuff, and there's momentum that happens, but the market, for the most part, is something that in the short run is not rational. Most people are gonna get in and out of stocks for emotional reasons. And if you get in and out of stocks for emotional reasons, that is gonna cause you to not be the best long-term investor As you'll see in this episode, I am gonna dive deep into a lot of different studies.

If you're an investing nerd, I think you're gonna enjoy this one because this is gonna be something that's really, really fun. The central question to all of this is, is waiting for a better entry price worth the potential returns that you miss while you're sitting on the sidelines? A lot of people feel as though they should sit on the sidelines.

They feel as though this is something you should be doing because that means that you're actively taking possession of your portfolio. But instead, what I'm gonna show you is a bunch of different studies on both sides. I'm gonna talk about the pros, I'm gonna talk about the cons, so that you can understand simply how all this stuff works.

And if you're new to investing, I'm gonna make this as simple as possible so you understand this, but I'm gonna go through case studies. I have tons of historic examples. I have tons of studies that we're gonna be diving into in this episode. And again, make sure you're referencing the show notes when we go through these episodes if you're not doing so already, because I'm gonna include a lot of the links to the studies I'm talking about.

I'm gonna include a lot of different links of just different things that we are talking about in this episode. So make sure you're following along in the show notes if you haven't done so already. And so in this episode, I'm gonna be talking through what the historical research says, I'm gonna be talking through what the actual math looks like behind all of these decisions, and when holding cash can be a smart financial decision.

So if you are ready for this, if this is something you're into, let's get into it. All right, let's dive in. So first, why does waiting for a market crash feel like a smart strategy? Because I think for a lot of folks out there, they think the smart move is to move their money into cash and just wait for this to pull back.

Well, nobody wants to have a $100,000 portfolio and watch it fall back to $75,000, or nobody wants to have a million dollar portfolio and watch it drop down to $750,000. The larger your portfolio gets, the bigger the overall impact actually feel. And people tend to remember dramatic crashes. So you may have lived through 2008, 2009.

You may have lived through the COVID pullback. You may have lived through other market shifts that have caused you to have this sort of tension when it comes to the market starting to drive higher prices. And here's the thing. Financial headlines continually are warning us about recessions. They're warning us about overvalued stocks.

They're talking about inflation. They're talking about geopolitical risks. They're talking about interest rates. And all of this stuff feels like it is so heavy on your portfolio. It feels like you need to do something about it because the way that they talk about this stuff. And so investors assume that waiting longer means that a crash is going to allow you to buy some of these stocks at discounts.

Like if you are at the height right now, all of a sudden you can pull your money out, put it on the sidelines, wait for this little pullback or this crash to happen, and you can buy stocks low. The problem is that waiting for a crash and putting your money on the sidelines is a form of market timing. And what we have shown on this podcast time and time again is that market timing or trying to figure out what direction the market is gonna go over the short run is a fool's errand.

And I'm gonna show you data that backs this up as we start to think about this. Now, to make this work, first, you need to get several different decisions correct in order for all of this to work. One, you need to decide when stocks are too expensive. So you need to have an understanding of the market and know when all of these different stocks are actually too expensive and probably should not be purchased at these specific prices.

Two, you need to determine how long you should be remaining in cash. Because what if you put it into cash and then you have to wait a couple of years 'cause the market continues to go up? So you need to get the decision right on how long you should be waiting in cash. Three, you need to recognize when the decline is large enough so you can actually deploy your cash.

What if you deploy your cash halfway on the way down? Then all of that cash starts to get reduced when you deploy that capital. Then you actually need to have the emotional wherewithal to invest when the market is falling. It is a lot easier said than done when the market goes down twenty percent to decide that I'm actually going to invest my dollars during this timeframe.

There's a lot of psychology involved with this. And you need to avoid selling again if prices continue dropping. Because once you have your dollars in there, then you need to make sure that you are holding firm because you made your choice, you made your decision, and now you have your investment plan in place that is moving forward.

See, predicting when stocks will decline is a little bit easier than actually staying and knowing when to act. I mean, it's much, much more difficult to know when to act and what to do

And so I want to go into some research because one of the best studies actually came out of Charles Schwab. And Charles Schwab compared five hypothetical investors who each received two thousand dollars at the beginning of every single year from the years two thousand and five to two thousand and twenty-four.

Now, here's the thing that I want you to understand, okay? The investor who had perfect timing, meaning they invested at each year's lowest point, had an end portfolio of a hundred and eighty-six thousand seventy-seven dollars. And if you're watching this or you're listening to this, we're actually gonna put this on the screen, so make sure you're checking this out.

If you invested immediately each year, meaning every single year at the beginning of the year you just invested immediately in January, you would have a hundred and seventy thousand five hundred and fifty-five dollars. If you invested monthly throughout each year, meaning dollar cost average throughout the month, you'd have a hundred and sixty-six thousand five hundred and ninety-one dollars.

If you had terrible timing, meaning you invested at each year's highest point you would have $151,343. And if you stayed in cash, in treasury bills, you would have $47,357. So each investor throughout this entire timeframe had $40,000 in total contributions over the course of that 20-year period. And the study assumed that reinvested income and excluded taxes and fees in this study.

Now, here's the surprising thing about this, okay? Perfect timing, meaning literally having a crystal ball and understanding the perfect time to get in and out of these investments, beats investing immediately by about $15,522. Investing at the worst possible time each year produced more than three times the ending wealth of just staying into cash.

So if you were the worst possible investor, you were gonna still have three times more during this study than someone who just stayed in cash throughout that timeframe. This is why cash is trash. We want you to get your dollars invested. You wanna have cash to preserve certain areas. We'll talk about when to have cash in a second, but this is gonna be one of those things that I think is really, really important for people to note.

The person who invested immediately ended up with approximately $123,000 more than the person who never invested in stocks whatsoever. And across 80 rolling 20-year periods in- investing immediately never, ever ranked last, meaning getting your dollars moving and getting your dollars invested never ranked last throughout this entire study.

And so here's the key takeaway that I want you to understand, and we'll link that study down below in the show notes. But the penalty for never getting invested is far greater than the penalty for investing at an imperfect time. I want you to understand this again. You don't have to be perfect as an investor.

You just have to continue investing in the market. You have to get your dollars working. Why? Because your money can work so much harder than you ever can. If you wanna make money while you sleep, if you wanna truly have passive income, passive income is that buzzword that people love to talk about. And if you wanna truly have that passive income, getting your dollars invested is the first step.

This is the thing that we need to think about doing. So this is a great study, and it looked over that 20-year timeframe. It looked over a timeframe that is really close to a lot of us in terms of a lot of the market that we saw. But let's look even deeper Because what if you wanted to wait? Maybe you wanted to just wait for a ten percent pullback, or a twenty percent pullback, or maybe you just wanted to wait for five percent pullbacks because you feel as though, okay, the market is really overvalued, Andrew.

And in reality, I know that I can time it at least for a five or ten percent pullback. I know it's gonna be pulling back at some point in time soon. Well, let's look at another study because City Wealth examined S&P 500 data from nineteen sixty to July of two thousand and twenty-five to evaluate what happens when investors wait for a decline after a market's high.

So let's say, for example, you're thinking about right now where the S&P 500 hits an all-time high, and you're like, "You know what? I know that at some point in time, the S&P 500 is gonna have a decline, and it's gonna have a five percent decline or a ten percent decline. And so I'm gonna wait for that decline, and then I'm gonna get my cash deployed into this investment."

Here's the crazy part about this study. Get ready for this. All right? So if a-an investor was waiting for a five percent pullback, meaning they were waiting for the market to pull back five percent, their average wait time over that timeframe was a hundred and forty-three trading days, meaning that for a hundred and forty-three days, you did not have your money invested.

The amount of their money that was invested was about sixty-two point five percent. Okay? If there was a ten percent correction, they'd be waiting two hundred and twenty-five trading days on average. And if there was a twenty percent correction, like waiting for a twenty percent decline, which is a buzzword I hear a lot of people say, "Oh, I'm waiting for a twenty percent decline, then I'll get my cash deployed," the average wait time is two hundred and ninety days.

And so these figures are actually coming from the historical comparison of waiting strategies over those specific time horizon. Now, what does this tell us? What does this tell us about our investments, and what does this tell us about long-term investing that we need to think through and what we need to consider?

One is waiting for a small decline can already mean spending months and months in cash. And if you keep your money in cash on the sidelines for too long, money that was supposed to be deployed for investments, well, all of a sudden, we could see reduced overall returns in our total portfolio. In fact, waiting for a larger crash can mean missing a substantial portion of the investment period.

Listen, losing out on days, which you will see in another study that I show you here today in this episode, losing out on some of the best days overall can reduce your overall return significantly. In fact, some investors never receive their target entry point with their planned investment time horizon if you are looking at this.

So let, let's say for example, because they did this in such a long-term timeframe, what if you're waiting for that twenty percent pullback? Well, if you're waiting for that twenty percent pullback over the course of the last couple of years, that may never even come. So you're sitting for years into cash because of this.

And even when the decline eventually arrives, the market may have risen considerably beforehand. What do I mean by that? Well, let's give a couple of examples of this. All right? First, let me give you a case study. All right? The market falls 20%, but you still pay more than today's price, and I wanna show you this example.

So let's say, for example, an investor has $100,000 ready to invest in the S&P 500 index fund. And let's say the index right now is at 5,000. All right? And they decide to wait for a 20% crash. They wanna wait for this 20% pullback in order to make sure that this all works. But before the crash arrives, the market has risen 40%.

So when they started, the S&P 500 was at 5,000. The market rose 40%, and so then it rose to 7,000 during that timeframe. So they were in cash, and it rose to 7,000. But then all of a sudden, yes, the market finally pulls back 20% so they could deploy their capital and stick to their specific plan. But when they deploy their capital, the S&P 500 is at 5,600.

So the investor successfully waits for that 20% market decline, but the market is still 12% higher than when they decided to wait. When they originally decided to wait, the market is 12% above that timeframe at 5,600. Remember, they started at 5,000. This is one of those things that I think more and more people need to realize when they say they wanna wait in cash.

You cannot perfectly time this, and this happens all the time. Literally happens all the time. And this is also assuming zero cash interest, dividends, or any fees put into place. So with that original $100,000, they would have missed out on $12,000 worth of gains or that 12% gain over that timeframe. And this is really something that is a huge deal because waiting for the 20% pullback cost you $12,000 in this scenario.

The larger your portfolio gets, the bigger the implications are. This is why you don't wanna play around with your portfolio as it begins to grow. And really, you don't wanna play around with your portfolio ever. But as it begins to grow and as you get to the half a million, then you get to the million-dollar mark, all of a sudden you are going to see that the impact is greater and greater every single year Here's a second case study I wanna go through, okay?

Well, what happens if you wait three years to invest your $100,000? So let's assume that there's Investor A and Investor B, all right? And these two investors each have $100,000 available today. Investor A invests their dollars immediately. Investor B, they wait three years for a crash to come into play.

And typically, like think about the last time we had a crash, we didn't have a true crash for a little while. Now, to isolate these opportunity costs, we're gonna assume a hypothetical 8% annual market return and no return on the cash that sits idle. So Investor B that is waiting for the crash, there's no return on their cash whatsoever, all right?

So Investor A invests immediately, all right? So the $100,000 gets invested, and in year one, they're gonna have $108,000. In year two, they're gonna have $116,640. In year three, they're gonna have $125,971, while in year three, the one who stays in cash is still going to have $100,000. And after three years, the market has risen approximately 26%.

Now, let's assume that it falls 20% right after. Even if it fell 20% in this simple, easy example, after the decline, the first investor's portfolio, Investor A, would still be $100,777, while Investor B, who waited in cash, will only have $100,000. And so the immediate investor is still out ahead. And I think this is one of those scenarios that in reality, thinking you could time the market really just doesn't make sense.

And I'm giving you these scenarios just to drive this thing home, for you to understand that if you had a crystal ball, you could time the perfect timing. Sure, it makes sense, but the difference is minimal even if you try to time the market. It's minimal in terms of what you can do with your money long term And so let's look at a little more research because I wanna drive this home.

The research shows that investing at all-time highs has historically actually worked out surprisingly well. So a major reason that people sit in cash is the belief that the market is at an all-time high, and therefore this must be close to falling down. But all-time highs are a normal feature of a market that grows over time.

In fact, if you are in an economy that's doing well or you're in a stock market that's doing well, you're gonna see all-time highs over and over and over again. And a lot of people treat all-time highs as something like, "Oop, it hit the peak, it's coming on back down," or, "Oop, it's at the top now, it's gonna come back down."

And that's not what happens. That's not what always happens. Sure, we have increases and decreases in the short run, but timing that is just a form of day trading. You're trying to trade into the market, and it really does not make a ton of sense. And so Dimensional Fund Advisors examined US stock market returns from 1926 to 2025.

And so for folks who invested at an all-time high, on average, their one-year return was 13.8%, while those who waited for a 10% decline on average, their one-year return was 11.7%. And if you annualize this over three years, it's 10.4% versus 9.7%. Now, what stands out with this is that investing at all-time highs historically did not produce worse average returns over these time horizons.

And waiting for stocks to become cheaper is not automatically a better investing strategy because new highs can be followed by more new highs. And I think for most people out there thinking that the, "Oh man, we just hit the wave. It's at an all-time high. It's gonna come back down any point in time now."

It's g-- It's, it's not like you're throwing a football up in the air and it's gonna come on right back down. No. Instead, this is something that you really gotta do your research when you're thinking about this. This is why this is so important. Are you ready? This is one of the most important papers I think we have had over the course of the last few years, because J.P.

Morgan examined the performance of a $10,000 investment in the S&P 500 from January 3rd, 2005, all the way up to December 31st, 2024. All right? Now, here's the fascinating part. If you stayed fully invested, you would have $71,750 during that timeframe, about $10,000 invested through that timeframe, okay? If you missed the 10 best days, your $71,750 investment would drop to $32,871 just by missing the 10 best days.

If you missed the 20 best days, it's $19,724. If you missed the 30 best days, it is $12,948. That's a huge difference. If you missed the 40 best days, it's $8,905. Literally missing the 40 best days means that you are losing money. If you missed the 50 best days, this is $6,386, and then the 60 best days, $4,712.

Literally staying out of the market means that you are losing money when it comes to the rate of return. Missing only the 10 best days reduced ending wealth by more than half. Ten days reduced your overall wealth within this portfolio by half. Let's say, for example, you and your friend decide to do this, and your in-portfolio value is a million dollars, where your friend who missed out on the 10 best days has $500,000.

That is a half-a-million-dollar decision to decide, "I am gonna wait for a correction." Wow, that is a big, heavy weight to put on your shoulders to try to time the market. That is a heavy weight, and I'm telling you right now, most people out there, and I'm saying more than 90% of people out there, don't have the emotional wherewithal to time the market properly.

It's an emotional game first, and then you have to have the acumen to understand the financials. And let me just tell you, the financials are a little bit more complicated than most people realize. They think they have a surface-level value of understanding what the financials are, but it gets harder and harder.

Now, I'm not saying this to make you say, "No, I'm not gonna keep anything in cash or idle." I don't want you to think cash is trash, 'cause it's not completely trash, but it is in situations where you are trying to time the market. And we'll link that study up down below as well, 'cause I think this is really, really important when it comes to understanding how this works.

Six of the seven best days occurred right after the worst days, by the way, in this study with J.P. Morgan. So a lot of people will wait for those pullbacks, and a lot of those best days occurred immediately after the worst days, which is why staying invested typically will win in a lot of different scenarios.

Seven of the 10 best market days occurred two weeks after the 10 worst days. Boy, oh boy. But then you may be asking yourself, okay, well what if I get an inheritance or what if I get a big lump sum of money? Should I kind of dollar cost average? Meaning putting, you know, let's say you get $10,000, should I put $1,000 a month into the market over the course of 10 months to spread out that risk?

Or should I invest it all at once and get those dollars moving? Well, never fear my friends, because keeping your money sidelines in cash, we're gonna figure out exactly what happened. So Vanguard published a research in 2023 and they compared investing a lump sum immediately with spreading out your investments over time.

Now I wanna be clear about this. This does not mean investing a portion of your paycheck that you get paid every single month. Obviously we're gonna dollar cost average that way. What I'm talking about is if you get a big lump sum like a bonus or if you get a big lump sum like an inheritance or you win the lottery or you, whatever else you can do to get a big lump sum, if you invested all of it at once versus spreading out what you're investing it, what would happen here?

All right. Well the research examined historical and simulated investment returns across different markets. Lump sum investing, meaning investing all of it at once, outperformed dollar cost averaging approximately 68% of the time in its global equity historical comparison. Lump sum investing outperformed remaining in cash approximately 70% of the time and cost averaging outperformed remaining in cash approximately 69% of the time.

So the tier here is dollar cost averaging that lump sum has been better than sitting in cash. So when we look at this, you could think of the difference over this timeframe. In fact, Vanguard actually examined this with $100,000 invested. They looked at the historical distribution of outcomes for $100,000 investment over a one year period.

If you invest immediately, you'd have $139,453 or over the course of three months you'd have $131,012. The median was 111,000 and then within the fir- fifth percentile is when investing immediately actually loses to investing out over three months. So investing immediately generally just produces better results historically and spreading out investments over time sometimes protected investors from severe short-term declines.

But again, just getting those dollars invested is one of the most important things that you can think about So let's do a case study here, and let's think about an investor who waited for the 2020 crash. So if you think about this, there was the COVID-19 market crash, and this provides an interesting real-world example because the market declined rapidly, but then it recovered really quickly.

It was one of those rare times that if you think back on it, and if you don't remember it, it is something that is very, very interesting to go back and study. But the market declined rapidly because people freaked out when we were shutting everything down, and they were like, "Okay, well, I don't know what's gonna be happening going forward."

And so the market had this big old pullback. But then all of a sudden, the market came roaring back within the same year. And in fact, according to JP Morgan, US stocks fell approximately thirty-four percent in a little over a month. And so a lot of people were freaking out. I remember that timeframe, and I just smiled 'cause I watched this happen, and I had been training myself for over a decade to understand that when the market goes down, I can buy more stocks on sale.

And I didn't flinch for a single second. I'm telling you, like a lot of people were freaking out, and I'm telling you, I was mastering my money psychology for so many years in a row, telling myself for years and years and years, "When the market goes down, you buy more. When the market goes down, you buy more.

When the market goes down, this is a good thing. You can get stocks on sale. Whether it's socks or stocks, I like to buy things on sale." I would say this stuff all the time for decades and decades and decades. And then finally, in 2020, when-- This is when this podcast started, by the way. This is when we really started to see a big, big difference in my money psychology specifically.

So if you struggle with this stuff, working on your money psychology is really, really important. But here's the crazy thing, okay? So it dipped thirty-four percent in a little over a month. The market recovered to its previous highs in roughly four months after the low, and stocks ultimately finished 2020 higher-- more than sixteen percent higher than they did the year before It's the craziest case study if you go back and look at it, and I highly recommend a lot of people listening and watching this right now, go back and study 2008, 2009 so you can see how bad it can get.

Go back and study 2020 so that you can see how some sort of pandemic event or potentially a war or whatever else, how those can impact markets and what can happen if it does come roaring back. So let's think about three hypothetical investors in the COVID scenario. Investor A invested before the crash.

So they invested $100,000 before the market declined. They experienced the full drawdown, but they stayed invested throughout the recovery. Investor B bought near the bottom, and they held cash before the COVID crash, successfully invested near the market low, and benefited with the recovery. And investor C waited for confirmation.

They held cash during the initial decline, saw the market fall 20%, then 30%, decided to wait because the news continued getting worse, and missed much of the rebound before feeling comfortable investing. Investor B would have performed the best in this scenario, obviously, but you don't have a crystal ball to understand when that's going to happen.

And in reality, how many people who have the personality to move their money into cash before the market is gonna decline actually will invest their dollars when the market is declining, when the market is going down? Because that's what you have to do if you are gonna take that strategy, is you gotta get your dollars redeployed and reinvested So these are just some of the scenarios that I want you to think about and some of the ways that I want you to think about deploying your capital when it comes to being an investor.

Now, if you're saying to yourself, "Okay, Andrew, this is great, but what do you do? How do you think about this, and how do you deploy your cash?" Well, for me specifically, I want to get as many dollars working as I possibly can. So every single time I have cash on hand, I deploy that capital to where I want it to go.

So typically, I do this with automation. This is why we have money on autopilot. This is why we talk about this, is so that you can automate your money as soon as you possibly can into your different investment vehicles. I don't wait for pullbacks. I don't wait for crashes. Instead, I get my dollars invested as soon as I possibly can.

Why? Because I understand the data. I've divvied into the historical data to see exactly what's happening, which is why I wanted to do this episode, so that you all can understand this as well. Now, you may be saying to yourself, "Well, Warren Buffett sits in cash. Why would I not just copy what Warren Buffett does?"

Warren Buffett has a very different strategy when it comes to his company's investment strategy than it would have been if he was an individual investor. In fact, he recently just even talked about this. Someone asked him, "If you had much less money and you were an individual investor, would your strategy be the same?"

And he said, "No, my strategy would be completely different than what we do here at Berkshire Hathaway. We have so much capital that we need to deploy that we have to do it in a very different way, in an institutional way than what somebody else would do if they were an individual investor." And I want you to understand how important this is to note.

Just because Warren Buffett is sitting in cash does not mean you should be sitting in cash. And for some reason, I see people on X or on Twitter, or I see people on social media talking about Warren Buffett is in cash. This is why you should be in cash. Wait on the sidelines. The market's gonna crash. And over and over and over again, I read this stuff and I am amazed, and I am frustrated at how terrible of advice that is.

You need to understand how the markets move, and you need to understand history. Now, history may not repeat itself moving forward. I wanna make sure we have that caveat clear. There are times, and there are time frames where history is not repeated when it comes to the market. But all we have is the last hundred years to go off of, and this is a big, big deal.

We're in a lot of different scenarios. I think a lot of you just need to study some of the market history if you feel as though you're gonna get in and out of the market. If you feel as though you're gonna keep cash on the sidelines, then do a little extra due diligence to make sure that's the right choice, because this could be a six to seven-figure decision by keeping your cash on the sidelines.

Now let's dive into when you should keep cash, 'cause there are scenarios when you should have cash on hand, and it's very important to note when. Now, there's a difference between keeping cash and waiting for a crash, because holding cash is not inherently a mistake. In fact, holding cash is reducing your overall risk, and I like to think of cash as an insurance policy, essentially.

You're insuring your own personal financial situation. And so when you have cash on hand, there's a lot of different legitimate reasons to make sure that you have cash. But waiting for the market pullback is not one of the highest ones on my priority list. One of the best reasons, obviously, for anybody who's listening to this podcast for a long period of time, is an emergency fund.

If you are not familiar with our system on emergency funds and how to manage that cash flow, check out our episode called The One Three Six Method. I dive deep into emergency funds and how to manage your cash within your personal financial situation. Secondly is money needed for a home purchase. Like if you're saving for a down payment or you're saving for a down payment on something like a vehicle replacement, those are reasons to keep and maintain money in cash.

You can keep that in a high yield savings account. You can keep it in a T-bill ladder if you want to. But keeping that cash on hand and making sure you have it in place is super, super important. And by the way, if you're looking for a place to hold your cash for your high yield savings account, we'll have it linked up down below in the show notes as my favorite places.

If you have upcoming taxes, that's a reason to keep stuff in cash. If you have business expenses that are planned, keeping money in cash is for that. Short-term spending needs, like if you feel as though, you know You know in a couple of months you're gonna be going on a vacation, or you know in a couple of months you're gonna have to spend extra money on a new air conditioner for your home, or you know in a couple of months you're gonna have to get some new tires on your truck.

Well, those are reasons to make sure that you keep cash on hand and you're gonna deploy that capital. That's just saving to spend because at some point in time, like Jesse Meacham has said on this podcast, at some point in time, you're always gonna be spending money. Whether you're putting into retirement accounts, you're planning on spending that in the future.

Whether you're putting into your high-yield savings account, you're planning on spending that money when an emergency arises or when you are going to have a home down payment. And so because of this, we wanna think of this as cash allocations are really just allocations that are gonna allow us to spend in the future.

And so the amount of cash that you keep on hand is gonna depend on a number of different situations, but there's problematic reasons to hold cash. Problematic reason number one is that you're convinced the market is about to crash. Well, as we just showed you, nobody knows when the market is gonna crash, nobody has a crystal ball, and that is not a reason to hold cash on the sidelines.

The second reason is if you refuse to invest because stocks are at all-time highs. Well, stocks can continue their bull run, they can move further to all-time highs, and many times waiting on the sidelines can cost you a lot, and I mean a lot, of money. Three is you're waiting for a recession before you're gonna buy anything.

You could be waiting a very long period of time. If I would've started waiting when I was thinking a recession was coming, I would still be sitting in cash from the year two thousand and twelve. I mean, you cannot predict what's gonna happen here. Four is you want the market to fall a certain percentage.

Waiting for the market to fall a certain percentage is just gambling, to be honest. And then five is you have no clear plan for when you'll actually invest. If you don't have a plan in place or an investment plan in place, it is super important to have that. We teach people how to do that in Master Money Academy.

I think it's really important to make sure that you have that investment plan in place. It is one of the most powerful things that you can do So what should you do if you have $100,000 sitting in cash right now? Well, for most people, you have three options, okay? Option one is you can invest it immediately.

Okay? So if you invest your dollars immediately, this is going to maximize the amount of time that you have your dollars invested in the market. And as we have seen, this is one of the most powerful things that you can do. Time in the market beats timing the market, and that is one of those areas that if you say that time and time again, I would put that at the top of your investment plan.

Time in the market beats timing the market. Now, historically, this outperforms gradual investing more often than not. So if you have a h-- $100,000, getting those dollars working, historically the best route to go. This exposes the entire amount to immediate market volatility, so the risks involved are is if you invest that $100,000 and the market has a pullback, well then all of a sudden your $100,000 just turned into $80,000.

And so we wanna make sure that we understand that. And it's best suited for investors with long-term time horizons and sufficient tolerance to losses. So if you're okay, like I told you, during the COVID era, when the market pulled back 34%, I just had a little smile on my face because I was excited to buy more when stocks were on sale.

And it eventually, again, recovered where market was up on the year about 16%, and it was just one of those wild swings to again go look back on. And so for investors who have really long time horizons, I'm talking ten, 20, 30 years, this is a great thing to do is get those dollars invested so that they can begin working for you over time.

Now, option two It's the dollar cost average over a predetermined period. So you can go through the next six months and invest $16,667 every single month for the next six months. And the advantages there are is if it makes you feel better or you feel more comfortable, and it reduces the risk of investing everything immediately before a decline, then sure, that's great.

And it can help investors who feel anxious about having this large sum of money. Like money is there to reduce your stress and anxiety, and if you invest it all and you feel as though you're gonna have this weight of stress, then sure, you can go ahead and dollar cost average over the course of the next six months.

And it establishes a defined plan. Like that's your defined plan. That's what you're gonna do. That is so much better than just, you know, not having any plan whatsoever. So Ryan Sterling, who is the CEO of Nerd Wallet Wealth Partners, he's the co-host on the other show I do with Nerd Wallet Wealth Partners, he talks about this.

When they have clients come in and they bring them a large lump sum of cash, even if they wanna dollar cost average it, they will deploy that capital in a very short period of time. Meaning, during a very short period of time, they will take it and they will say, "Okay, we'll dollar cost average this, but we wanna do this over the course of two weeks.

We don't wanna do this over the course of six months because the longer that we wait to dollar cost average this out, the worse the returns potentially could be," and this is looking at some of the historical averages. And so the advantage is, again, is going to be it could lower the expected annual returns coming with investing immediately and leaves money temporarily outside of the intended portfolio, meaning it's just sitting in cash there, and it doesn't eliminate investment risk.

The other side of the coin to this is if you do keep it in cash and it does not outpace inflation, then we're looking at an inflation risk as well. So there are other risks involved there. Now, your third option here with $100,000 is to wait indefinitely for a market crash. All right? When you wait, you have no predetermined investment date.

So you could be waiting for one year, you could be waiting for ten years for all you know. You have no idea when you're gonna be deploying this money. You have no certainty about how far stocks must fall. And for you to even get those dollars working, you have risk of moving the target, and you have risk of remaining in cash during some sustained market rally.

Some big market rallies could be going on, and you are still sitting in cash waiting for the market to pull back. And then you risk being too fearful to invest when the market does drop. So for long-term money, having a defined investment plan and sticking to that investment plan is gonna be really, really important.

Okay? This is something that I think is really, really powerful So let's talk about the cost of waiting. If you cost of waiting over this timeframe, let me give you a case study or an example of this. So consider someone who has another hundred thousand dollars to invest, and the annual stock returns are at eight percent.

Now, cash in this scenario is gonna earn zero percent, and we're not gonna factor in taxes, fees, or additional contributions. All right? If you invest the money immediately, the value after twenty years is four hundred and sixty-six thousand ninety-six dollars. The value after thirty years is one million six thousand two hundred and sixty-six dollars.

But here's the crazy part. If you wait one year, then invest, like you're like, "I'm gonna stay on the sidelines and see what the market is doing," and then you wait one year to invest, the value drops to four hundred and thirty-one thousand five hundred and seventy dollars, and the value over thirty years drops to nine hundred and thirty-one thousand seven hundred and twenty-eight dollars.

If you wait three years, the value after twenty years drops to three hundred and seventy thousand, whereas the value after thirty years drops to seven hundred and ninety-eight thousand dollars. So you literally cost yourself two hundred and six thousand dollars by waiting for three years. It's literally hundreds of thousands of dollars.

And then ready for this one? If you just wait five years, then invest, then your value after twenty years goes from four hundred and sixty-six thousand, it drops down to three hundred and seventeen thousand, and your value after thirty years goes from one million six thousand to six hundred and eighty-four thousand dollars.

So here's the cost of waiting. Ready? The cost of waiting after five years is approximately a hundred and forty-nine thousand dollars over the course of twenty years and approximately three hundred and twenty-one thousand dollars over the course of thirty years. Guys, this is a six-figure decision to decide to wait in cash.

And if you wait too long or you miss out on some of these market increases, then you could be in a scenario where you're losing out on hundreds of thousands of dollars. Now, if you have some reason that you're waiting that you know that I don't know, then great. Do what you need to do because your investment decisions are ultimately yours, and you should take this information and do your own research when you think about this stuff.

But I want you to understand what the risks are because there are risks to staying in cash. There are risks to not getting your dollars invested when you have capital on hand that was intended to be invested for long-term wealth building. And so I want you to understand those risks So let's talk about the big takeaways that I have from today's episode.

Number one, waiting for a market crash sounds logical, but successfully timing the market requires multiple difficult decisions, which we talked about all those difficult decisions, and you have to get all of them right for this actually to work properly. Two is the research from Schwab shows that even investors with terrible timing historically did much better than investors who never got into stocks.

So even if you had the worst timing possible, you still did or performed better than investors who never invested their money. Three, a twenty percent market crash doesn't necessarily mean stocks are cheaper than they are today. Meaning if there is a twenty percent market crash, it could be after the market went up forty percent when you started waiting.

Four, investing at all-time highs has historically produced competitive long-term returns, meaning investing at all-time highs in the stuff that we looked at showed that you actually still came out ahead from someone who was waiting for some of those pullbacks. Five, missing just a handful of the strong market days can dramatically reduce your overall returns.

So six is Vanguard's research shows that investing available money immediately has historically outperformed spreading it out over time, roughly two-thirds of the time. Seven, dollar cost averaging can be a reasonable compromise for someone who would otherwise remain entirely in cash. Eight, cash is appropriate for emergencies, short-term goals, and planned expenses.

That's when you wanna use cash. The problem is when you delay long-term investments while trying to predict a crash. You can't predict that crash. Nine, the right asset allocation matters more than finding the perfect entry point. Like pick your asset allocation, pick your investment plan. Don't try to pick the perfect entry point.

And ten, a long-term investor doesn't need to predict the next crash in order to build wealth. Here's the takeaway. The stock market is gonna crash again. One day there's gonna be a recession. There's gonna be a reduction. It could be tomorrow. It could be next week. It could be next month. It could be next year.

It could be in the next ten years. We don't know when it's gonna happen. At least I don't know when it's gonna happen. I don't have a crystal ball, and it shouldn't be something that you feel as though you know when it's gonna happen. There's gonna be a lot of people who make it look like they're the smartest investors in the world.

They'll bring out their whiteboards on YouTube or social media and talk about derivatives, and they'll talk about option contracts. They'll talk about the different ways that the bonds are moving and the interest rates are affecting these bonds. And all of a sudden you're gonna feel as though, "Oh, these people know what they're talking about.

They're gonna be able to predict the market for me." But in reality, what you need to understand is what history shows us and what history tells us. Sure, we could have a decade-long run where the market goes in one direction or the other, or we could have a couple of years where you're gonna see some of these pullbacks, and if you waited in cash, you're gonna feel like you're right.

But over the course of the long term, long-term investors know that staying in the market is the key to building wealth. Listen, if you want to learn how to build your portfolio, if you want to learn how to do this stuff, exactly what I'm talking about here, consider joining Master Money Academy. We have all of our investing courses there.

We have our personal finance courses there. And every single week I get l- on live coaching calls and you can ask me all the questions that you have on hand. This is a place for you to learn how to build wealth, how to grow your portfolio, and how to transform your financial life. And it is simply one of the best things that you can do for your finances long term if you wanna get help directly from me.

Also, if you wanna get one-on-one coaching from me and you make over $100,000 per year, shoot me an email, andrew@mastermoney.co and let me know and I can send you an application to see if you are a good fit for our one-on-one coaching programs. We are also launching some really cool one-on-one coaching systems we're gonna be putting in place around investing for folks, uh, and those are coming soon as well, so get ready for that.

And thank you guys so much for being here. I truly appreciate it. My goal with these episodes is to bring you as much value as possible. When we jump on one of these one-on-one coaching calls, a lot of times one of the, the coolest things that happens for me is they s- they tell me all the progress they have made just from listening to this podcast, listening to this free content, and that's my entire goal.

I want you to be able to listen to this free content and have the ability to be able to build generational wealth for you and your family. And so I'm so excited that you're here. I'm so excited that you're getting your finances right. And get ready, 'cause I've got some cool episodes planned just like this one.

And I hope you enjoy these deep dives 'cause I really enjoy making these. I really enjoy doing the research for these. I really enjoy diving deep into the history of the market so it helps you make better financial decisions moving forward. And so again, make sure you're doing your own research. Make sure you're diving deeper into this stuff.

Be prudent when it comes to your investment plan so that you can build the best possible life for you and your family, 'cause that's ultimately what we're trying to achieve here is financial freedom for each and every single one of you out there. I cannot thank you guys enough for being here. I'm so glad that you're listening to this podcast and that you're here with me.

If you're getting value, share this with a family member or friend. Leave a five-star rating and review and don't forget to make sure you're subscribed to the show. Thank you again for being here, and I will see you on the next episode