The Ultimate Guide to Investing Cash on the Sidelines

Charlie Bilello

Director of Financial Education

Last Updated
February 01, 2023
Couple works to invest their cash that's been sitting on the sidelines

This is a situation many of you will be familiar with.

You have money to invest that’s been sitting in cash, either from the sale of a business, a recent inheritance or built-up savings. This is money you don’t expect to need or access for more than 20 years, if ever.

You know that cash is likely to significantly underperform a diversified investment portfolio over the next 20+ years, but you just can’t pull the trigger.

You know you can’t time the market, but…

  • “I’m waiting for a bigger correction to get in.”
  • “Valuations are too high.”
  • “What if the economy enters a recession this year?”
  • “Interest rates have been rising. Isn’t that bad for stocks?”

These are all reasonable things to think about when allocating money that has been sitting on the sidelines.

But what does the data suggest?


  • What is the opportunity cost of sitting in cash?
  • What are the odds you’ll have a chance to buy in at a lower price than today?
  • What are the odds that waiting for a bear market will allow you to buy in at a better price than today?
  • If you could have predicted the start and end of all prior recessions with perfect precision, how additive would that have been to your returns?
  • What are the odds that dollar-cost averaging into the market will beat a lump sum today?
  • Should you time new money allocations based on valuation?
  • Should interest rates play a role in timing the market?

Let’s take a look at each of these questions…

1) The Opportunity Cost of Sitting in Cash

Many studies compare equity returns to a 0% return on cash, assuming cash is held in a zero-interest checking account or stuffed underneath your mattress.

While this certainly applies to some sideline cash, with minimal effort one can generate a positive return on cash holdings, and I believe it’s more accurate to use this return in determining the true cost of “sitting on the sidelines.”

The average yield on cash since 1928 has been 3.3% (using 3-month Treasury bills as a proxy), but yields have fluctuated considerably over time, from 0% on the low end all the way up to 14% on the high end.

Going back to 1928, what were your odds of beating the S&P 500 while sitting in cash?

31% over a 1-year period.

Importantly, the longer you sat in cash, the lower your chances of beating the market. Over a five-year period, your odds of outperforming the market moved down to 22%, and after 10 years your odds were down to 16%. In every 25-year period (including those who bought at the peak in 1929), an investment in the S&P 500 has beaten cash.

What does sitting in cash cost you?

Sometimes nothing, when markets are going down. This is particularly true during long bear markets.

But much more often, it’s costing you something, with that something increasing as the years go by. Over one-year periods, the average cost of holding cash has been roughly 8%. But over 25-year periods, this grows to more than 1,200%.

2) What are the odds that you’ll have a chance to buy in at a lower price than today?

Many investors will tell you they’re just waiting for a correction to get in. That’s a fine thought, and buying stocks on sale is generally a good idea.

The only problem is that a correction may not come for some time, and when it does, it may never take stocks below today’s levels. You could very well be waiting forever to get invested.

Let me explain.

Historically, stocks have had a 75% probability of closing lower at some point in the future (note: using monthly S&P 500 Total Return data going back to 1928). Those are pretty good odds, but it means that 25% of time stocks just keep on running, and you don’t ever have an opportunity to buy in at a lower price than today.

My favorite example of this occurred in 1995. Stocks ran higher out of the gate, and by the end of February the S&P 500 was up more than 6% on the year.

Let’s say you were an investor at that time with cash on the sidelines, and you wanted to wait for a minor 5% pullback to get back in. Well, you would’ve had to wait until July 1996 before that pullback would come. And when it did, the S&P 500 was still more than 25% higher than where it closed in February 1995.

Would you have deployed your sideline cash then? I doubt it. Which is why waiting for a correction can be a difficult game to play.

3) What are the odds that waiting for a bear market will allow you to buy in at a better price than today?

Some investors want more than a correction or lower price point to get invested. They want a significant decline.

Let’s say you need to see a minimum drawdown of 20% on a monthly closing basis to get invested. How often would waiting for such a drawdown allow you to buy in at a lower level than today?

Going back to 1928, only 21% of the time.

(Note: I’m being generous in allowing for a larger than 20% drawdown to hit your lower-level target, taking the lowest monthly close of each bear market to compare to prior prices).

That means 79% of the time, even if you have the discipline to wait for a 20% decline before investing (no easy task), when it finally comes it will be at a higher level than today.

Following the bear market low in March 2009, stocks went vertical, rallying seven months in a row and nine out of the next 10 months into year-end. By the end of 2009, many thought it would be prudent to wait for another 20% pullback before getting back in.

But when the 20% decline on a monthly closing basis finally occurred in 2022, it only brought the S&P 500 back to 2021 levels. This was still 329% higher than where stocks ended 2009.

Even if the 2022 decline were to have another 50% drop (like we saw in 2007-09), it would only take stocks back to 2017 levels (at 185% higher than the end of 2009).

The lesson here is clear. If you’re waiting for a large decline to get invested, you have to be prepared to wait a very long time with the understanding that when the decline eventually comes, it could very well leave stocks at a higher level than today.

4) What are the odds that dollar-cost averaging into the market will beat a lump sum today?

Up until now, we’ve assumed that you are investing all your sideline cash at once, otherwise known as a “lump sum” investment.

There’s an alternative to this approach known as dollar-cost averaging.

Let’s say you have $100,000 of sideline cash to invest. You could put all of it into the market today, or you could invest $X per month over Y years.

Let’s assume you invest that $100,000 in equal installments over a period of 12 months, or $8,333.33 per month, while keeping the balance in cash (3-month Treasury bills).

How often would such a strategy beat a lump sum investment ($100,000 all at once)?

Only 32% of the time. The simple reason: markets tend to rise more than they fall, and that rise has beaten cash over 12-month periods 68% of the time.

The longer the period over which you dollar-cost average, the greater the odds the stock market will be substantially higher, and the more likely a lump will be the superior choice. If you spread the same $100,000 over 36 months, your odds of beating a lump sum move down to 26%.

Importantly, the 26% odds were not distributed evenly over time. The last 36-month period in which dollar-cost averaging beat lump sum investing was October 2008 through September 2011. Starting in November 2008, a lump sum has beaten a 36-month dollar-cost-averaging strategy every single time.

True, this is a function of mostly being in an upwardly trending market during this period, but it illustrates just how long the odds of timing via dollar-cost averaging can be stacked against you.

5) Should you time new money allocations based on valuation? What are the odds that such a strategy will be successful?

Even after the stock market decline in 2022, U.S. equity valuations are high.

How high?

At 29, the S&P 500’s CAPE Ratio (also known as “Shiller P/E”) is above 92% of historical readings.

As valuations tend to be inversely correlated with long-term future returns, this is a concern for many investors. The thought: why not wait for lower valuations before getting in?

That seems like a valid question, but historically how would a market-timing system based on valuations have fared?

Let’s take a look.

First, we need to come up with a system.

Starting in 1928 (assuming CAPE data was available then), let’s say you moved from stocks to cash every time the CAPE ratio moved above the 90th percentile and only got back into stocks when it moved back below the 90th percentile (note: using a rolling percentile, as you wouldn’t have had the full historical data set at that time).

How would such a strategy have fared? Not terrible, but at 8.7% annualized, still lower than the S&P 500’s buy-and-hold return of 9.4%.

Importantly, though, you would’ve had to sit in cash through some incredible runs in stocks. The most memorable of these would be the 1990s, when the CAPE ratio first moved above the 90th percentile in February 1995. Over the next five years, the S&P 500 would more than triple as valuations went to heights never before seen.

It would come crashing down thereafter (during the 2000-02 bear market), but how many investors could sit in cash for five years during such a run? Even after the crash, stocks weren’t exactly cheap, with a low CAPE of 21 in February 2003 still in the 86th percentile. Would that have been cheap enough for a value-conscious investor? Not likely.

More recently, the CAPE ratio moved above the 90th percentile in October 2013. Stocks more than doubled thereafter before finally moving briefly back below the 90th percentile in March 2020.

This system assumes that investors concerned about valuations will buy back in once valuations are no longer above the 90th percentile. But for someone that has sat out of stocks for years on end, this is probably not a realistic assumption.

What if we change the system to say that an investor who went to cash after stocks moved above the 90th percentile only got back into stocks when they were below the 75th percentile? How would such a system have fared?

Exactly the same: 8.7% annualized versus 9.4% for buy-and-hold.

But is the 75th percentile “cheap?” It doesn’t sound like it, but lowering the threshold from there will leave you out of the market for even longer stretches of time. The last time the S&P 500 had a CAPE ratio below the 50th percentile was in April 2009. A month later, they were no longer “cheap” and haven’t been since. Stocks are up sixfold since then.

That’s not to say valuations don’t matter. At extremes, they most certainly do, as they tend to lead to below-average future returns. Perhaps we should expect that today from U.S. equities. But we have no way of knowing the path of those lower returns, making it quite difficult to time. The bear market that began in January 2022 could continue to hit new lows, stocks could rally before a larger decline, or stocks could simply trade sideways for years, working off that higher valuation.

Additionally, over the long run, returns from high valuations can still be positive (for example, with dividends, the S&P 500 has quadrupled since the March 2000 valuation extreme), making cash a less attractive option with the passage of time.

An alternative approach to trying to time periods with high valuations is to increase your diversification into asset classes that aren’t at similar extremes. Japanese investors in the late 1980s would have benefited greatly from this principle in the aftermath of the historic bubble they experienced.

6) What if there’s another recession coming?

Many investors are asking: What if a recession is coming? Wouldn’t stocks fall further? And once you’re in a recession, why not wait until the recession is over before investing?

Let’s take a look.

Historically, bear markets associated with recessions have indeed been steeper, averaging a 42% decline versus a 29% decline for stock downturns not accompanied by a recession.

But have all recessions led to bear markets?

No. In 1945, there was an eight-month recession without any stock market decline of note. The 1953-54 and 1960-61 recessions had declines of only 14% in stocks, while the 1980 recession saw stocks decline 17%.

So while a recession is likely to lead to a sharp decline in stocks, it’s by no means guaranteed.

But getting back to the question of timing, let’s say you’re the best economist that ever lived. You know exactly when recessions start and end in advance, and you allocate to cash during recessions and stocks only during expansions.

What would your returns look like since 1928? 10.7% per year versus 9.4% for buy-and-hold.

Not bad, until you dig into the data and see that all this outperformance came from avoiding the bulk of the losses during the Great Depression (when stocks declined 86%). Since the Depression, if you were able to time the next 14 recessions perfectly, you would have had underperformed with a 10.6% return versus 11.3% for buy-and-hold.

In reality, no one could’ve predicted every recession with such precision. Let’s say instead that you were early in getting out, moving to cash a year before the recession and getting back into stocks a year after it ended. Or more likely, let’s say you were a little late and moved to cash six months after a recession started and moved back into stocks a year after it ended. That would still be pretty remarkable timing.

How would these scenarios have fared? Worse than a simple buy-and-hold, and this isn’t factoring in transaction costs and taxes, which would skew the results further in favor of doing nothing.

How can that be?

The stock market isn’t the economy. It often starts going down before the economy turns south and starts turning back up before the downturn ends. Getting that timing right on both ends is nearly impossible, and in trying to do so you’re likely to cause more harm than good.

Complicating matters is the fact that stocks can go down without a recession (though many will assume we’re in one when it happens — see 2011 and 2018 for recent examples) and there can be a recession with only a small or short-lived decline in stocks (2020 is the perfect example, with a one-month bear market, the shortest in history), making timing such a move that much more difficult.

I know what you’re thinking. Maybe you can’t time the start of a recession, but why should you invest new money during times when the economy is already in one? Wouldn’t it be better to wait for the news to improve and the downturn to end before adding to your portfolio?

Historically, the answer has been a resounding no.

During the last six recessions, the S&P 500 gained an average of 61% from its low by the time the official end of the recession was declared by NBER.

In October 2008, during the worst recession the U.S. had experienced since the Great Depression, Warren Buffett famously penned an op-ed entitled “Buy American. I am.” He made the case for investing in equities despite all the terrible news of the day, saying that if you “wait for the robins, spring will be over.”

7) Should interest rates play a role in timing the market?

The 10-year Treasury bond yield rose 2.37% in 2022 (from 1.52% to 3.88%), the largest annual increase since 1980. At the same time, the S&P 500 suffered its largest decline since 2008.

There’s a widespread belief that this was par for the course, with interest rates and stocks prices being natural enemies. While that was certainly true in 2022, what does the historical evidence suggest? Are rising interest rates always bad for stocks?

As it turns out, not exactly.

There’s almost a 0% correlation between changes in interest rates and changes in stock prices. In plain English, that means even if you could predict the direction of interest rates (which is no easy task), it would tell you next to nothing about the direction of stock prices.

Since 1928, the average one-year returns for the S&P 500 are almost exactly the same during periods of rising/falling 10-year Treasury yields (+11.6%/+11.5% respectively).

That’s not to say that higher rates can’t act as an impediment to economic growth or stock market returns at times. They most certainly can and did in 2022. But yields are just one variable in a highly complex system that is the stock market.

Still not convinced?

Let’s go back to the data and look at the years in which the 10-year Treasury yield rose by 1% or more. That’s happened 11 times since 1928, and in nine out of those 11 years the S&P 500 finished higher. This includes 1980, a year in which the 10-year Treasury yield rose a record 2.45% (even more than 2022) while the S&P 500 advanced 31.7%.

What about longer periods where interest rates rose?

I’m glad you asked. During the 20-year period from 1949 to 1968, the 10-year Treasury yield rose from 2.32% to 6.03%.

How did stocks fare? They were up more than 1,500%, or 14.9% annualized.

While the return was above average, this was by no means an anomaly. Stocks tend to rise over time, regardless of the direction of interest rates.

Summary: Investing Cash on the Sidelines

When it comes to deploying cash on the sidelines, there are no easy answers.

Investing is just a game of odds, and the historical probabilities suggest there’s a cost to sitting in cash and that cost tends to grow exponentially with time.

Does that mean everyone should just close their eyes and invest all their cash on the sidelines today in a lump sum? Most certainly not.

Successful investing is about psychology more than anything else, and if putting everything in today via a lump sum causes you to lose sleep at night, you will not be able to stick with that portfolio for a week, never mind the next 20 plus years.

The portfolio with the highest expected return is completely irrelevant if you can’t handle its higher level of risk. It’s far better to be in a portfolio with lower returns that you can compound over 20 plus years than one with a higher return that you’re likely to abandon at the first sign of trouble.

I started this post by posing a hypothetical where an investor did not need the cash for more than 20 years, if ever. Under that scenario, there should be a pathway to investing at least some of that money to earn a higher long-term return. Maybe not for everyone (if you can’t handle any volatility, cash is the only option), but for most people.

For simplicity, I assumed a 100% allocation to U.S. equities in this post, but in reality, most investors would be better served with a more diversified portfolio and a lower risk profile. This is particularly true for investors who have been sitting out of the market in fear of getting in at the top. The last thing they need is confirmation of that view if a steep market decline were to occur shortly after investing. A lower initial risk profile than necessary would cushion the blow if that were to occur and would provide an opportunity to increase equity exposure into the decline.

I believe the goal for all investors should be to remain invested long enough to reap the enormous benefits of long-term compounding. That starts with finding a portfolio and a plan that’s best suited to you. If you’re thinking about your own portfolio and wondering how to allocate cash on the sidelines, reach out. We’re here to help.

The views and opinions shared by Mr. Bilello are his own and not necessarily those of Creative Planning.
Returns are based on the S&P 500 Total Return Index, an unmanaged, capitalization-weighted index that measures the performance of 500 large capitalization domestic stocks representing all major industries. Indices do not include fees or operating expenses and are not available for actual investment. The hypothetical performance calculations are shown for illustrative purposes only and are not meant to be representative of actual results while investing over the time periods shown. The hypothetical performance calculations for the respective strategies are shown gross of fees. If fees were included returns would be lower. Hypothetical performance returns reflect the reinvestment of all dividends. The hypothetical performance results have certain inherent limitations. Unlike an actual performance record, they do not reflect actual trading, liquidity constraints, fees and other costs. Also, since the trades have not actually been executed, the results may have under- or overcompensated for the impact of certain market factors such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. Returns will fluctuate and an investment upon redemption may be worth more or less than its original value. Past performance is not indicative of future returns. An individual cannot invest directly in an index.
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This commentary is provided for general information purposes only and should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.

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