Financial experts commonly advise maintaining an emergency fund to handle unexpected needs. Similarly, Hedge funds and institutional investors often discuss having “cash on the sidelines”—capital not yet invested in the market but readily available to seize future opportunities. Economists generally attribute the holding of money to three motives: transactional, precautionary, and speculative. This post will primarily focus on the speculative motive, specifically the strategic advantage of holding cash to leverage future investment opportunities in the stock market.

While holding some cash and waiting for a market pullback might seem like losing ground to inflation or missing out on potential returns, the potential gains from capitalizing on a significant downturn can often outweigh these concerns. The substantial returns realized by investors who had cash ready to deploy during events like the COVID-19 pandemic and the recent trade war, allowing them to acquire quality stocks at discounted prices, illustrate this point. For instance, if we were to invest in Exxon Mobil Corporation (XOM) stock during the 2019 pandemic, the stock would have been up about a whopping 150% gain from the lows.

Benefits of Saving Cash for Investment

Previously, I had not prioritized holding cash. However, one of the most significant lessons I learned during the trade war was the strategic advantage of having readily available capital to capitalize on market downturns and acquire quality stocks with strong fundamentals at attractive prices. This approach benefits investors by preventing the premature liquidation of existing positions to cover unexpected expenses. It allows them to take advantage of significant market opportunities, either by initiating new positions or by dollar-cost averaging into existing ones with strong balance sheets.

Dollar-cost averaging involves investing a fixed amount of money at regular intervals to reduce the average cost per share of an investment. For instance, if a stock is initially purchased at price (x) and subsequently experiences a sharp decline, employing dollar-cost averaging can help lower the overall average purchase price of that stock.

I have seen numerous positive outcomes in my portfolio by strategically adding to my quality stocks during significant pullbacks, leveraging the benefits of dollar-cost averaging. Additionally, found it advantageous to deploy lump sums of cash from sources like work bonuses or tax returns. However, I remain cautious with weak stocks that exhibit a consistent pattern of declining balance sheets, waiting for improvements in their fundamentals before considering investment, to avoid total loss of your investment dollars when it’s worth $0 and probably delisted. Also, readily available cash can be particularly crucial, especially during periods of market volatility, with the Volatility Index (VIX) reaching record highs, to dollar-cost average and not use a lump sum, not knowing exactly the market bottom, which can be impossible to time.

Source
Graham, B., & Zweig, J. (2006). The Intelligent Investor. Harper Business.

Moser, P. (2025, March 18). Dollar-cost averaging: Make your investing automatic and increase your savings. @SunLifeCA; Sun Life Assurance Company of Canada. https://www.sunlife.ca/en/tools-and-resources/money-and-finances/managing-your-money/dollar-cost-averaging-making-investing-automatic/

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