Holding a fifth of a portfolio in cash for three years used to cost about 5.2 points of return. It now costs about 2.0.
Nothing about patience changed. The interest rate did — and almost nobody has repriced the decision.
For fifteen years cash was a pure cost: you gave up the market's return and received nothing. That produced a generation of advice — "time in the market", "cash is trash" — which was correct at the time and is arithmetic rather than principle.
What waiting costs, before and now
| Over three years | Cash at 0% | Cash at 5.12% |
|---|---|---|
| A market compounding 8% gains | 26.0% | 26.0% |
| Your cash gains | 0% | 16.2% |
| A 20% cash position costs you | 5.2 points | 2.0 points |
| The cost of waiting fell by | — | 62% |
Two points of return over three years is a real cost and it is not a large one. It is roughly the difference between a good year and an average one — and in exchange you hold an option on every price in the market for three years.
That is the trade, stated plainly. It was a bad trade at zero. It is a reasonable one at five.
Cash is an option on future prices. For fifteen years you paid a premium to hold it. Now the option pays you 5.12% to wait.
Cash is only patience if you can say what it is for
Here is the distinction that makes this an investment decision rather than a mood.
Cash held because the market feels high is a forecast, and a bad one — nobody has a usable method for that. Cash held because specific companies you want are above the price you will pay is a named position with an exit condition.
The second kind can be written down. Ours are:
| Company | Price at our report | What we said we would pay | The fall required |
|---|---|---|---|
| Palantir | $190 | Begin near $110 | −42% |
| ServiceNow | $137.76 | Add below $115 | −17% |
| Abbott | $96.69 | Add near $80 | −17% |
| Realty Income | $59.57 | Two dollars from the zone | −3% |
Sometimes the price never comes
In June we called Microsoft a wonderful business at a fair price and asked for $310. Two days later the shares touched $349.20 — inside our own estimate of value — and we were still waiting. They reached $497.93.
The cash earned 5.12% while that happened. It was not enough, and it was never going to be.
So the arithmetic at the top of this article is the floor on what waiting costs, not the ceiling. The real cost of a limit price is not the interest forgone — it is the occasional wonderful business that walks away from your number and never comes back.
And sometimes it works exactly as intended. Our McDonald's report set an add-zone and the price fell into it, on a business whose franchised margin had not moved. That is what the discipline is for, and it is far less memorable than the one that got away — which is precisely why people abandon limits at the wrong moment.
How to size it
Name the companies you would buy and the prices you would pay. Add up what you would spend if all of them hit. That number is your cash position; anything beyond it is not waiting for anything in particular.
The whole argument collapses if the money is sitting at 0.5% in a current account. Short government bills or a money-market fund — the 5.12% is the entire reason this decision changed, and most people's cash is not receiving it.
The right amount of cash is not a personality trait. If the rate halves, the cost of waiting roughly doubles, and a discipline that does not notice is a habit. Write the number down with the rate beside it.
A limit price that is never missed is set too high. The occasional wonderful business leaving without you is the cost of not spending seventeen years getting back to even on the ones you overpaid for.
A feeling that the market is high. Of the twenty-six companies we published in September, twenty-two yielded less than a government bond — which is a fact about prices, not a signal about timing.
It tells you to be selective, which is a statement about individual prices. It does not tell you when anything will happen, because nothing in the discipline described here requires knowing that.
One two dollars from our zone, one we were too strict about, and one we will not touch until it falls 42%.
Each with the price we would pay, written down in advance.
Frequently asked
How much cash should an investor hold?
Enough to buy the things on your list at the prices you have written down, and no more. The amount follows from the opportunities you are actually waiting for — if you have named three companies and the prices you want them at, the cash required is arithmetic. If you cannot name them, the cash is not patience, it is indecision with a nicer word.
What does cash drag actually cost?
Less than it did, by a lot. Over three years a market compounding 8% gains 26%, so a 20% cash position used to cost about 5.2 points of portfolio return when cash earned nothing. With cash at 5.12% it gains 16.2% over the same period, so the drag is about 2.0 points — a 62% reduction in the cost of waiting.
Is holding cash the same as market timing?
Only if you hold it because of a view about the market. Holding it because specific companies you want are above the price you will pay is a different thing — it is an option on named opportunities, not a forecast about an index. The test is whether you can say what the cash is for.
Is cash still worth holding if rates fall?
It becomes more expensive to hold, and that is the point: the right amount is not a fixed share of a portfolio, it moves with what cash earns. At 5.12% the cost of waiting is small enough that patience is nearly free. At 1% it is not, and a discipline that does not adjust for that is a habit rather than a decision.