The Case for Holding Cash on Purpose
Contents
The usual complaint about cash is easy to make, and it is a useful starting point for Trevor L Taylor, a Miami private investor and the founder of Fortius Capital, whose work centers on private transactions. Cash earns less than almost anything else over long periods, inflation erodes it, and every dollar held in reserve is a dollar not compounding in a business or a building. Warren Buffett made the case bluntly in a newspaper essay written during the 2008 panic, calling cash a long term asset that pays almost nothing and loses real value over time1. On a quarterly statement, a large balance can look like indecision.
That view misreads what cash does for someone who invests privately. Public markets let a buyer purchase almost anything on almost any day. Private deals arrive irregularly, often when other investors are short of capital, and they rarely wait.
Cash works like an option
An option is the right, without the obligation, to act later. A reserve gives exactly that. The price is a lower return on the reserve while it waits. In exchange the holder can commit quickly when terms are unusually good, meet a capital call without selling something else at a bad moment, and walk away from deals that fall short without feeling pressure to deploy.
Buffett’s own company shows the pattern. In his letter for 2024 he wrote that while commentators saw an extraordinary cash position at Berkshire, most shareholder money remained in equities, and that often nothing looks compelling while only rarely are opportunities plentiful2. The essay quoted above makes the same point from the other side: it was written to explain why he was buying while others sold.
The capital call benefit has grown more relevant. Bain reported that distributions as a share of net asset value fell to their lowest rate in over a decade3, so investors in private funds are waiting longer for money back while commitments still draw cash.
The least appreciated benefit is patience. An investor with no reserve and a steady stream of new money feels pressure to put it to work, and pressure lowers standards.
The strongest objection
The honest counterargument is that most people who hold cash for opportunities never deploy it well. They wait for a better price, the better price arrives, and fear keeps them out while inflation eats the reserve.
The evidence on timing supports that worry. John Maynard Keynes, running the endowment of King’s College, Cambridge, first tried a market timing approach with mixed success and missed the 1929 crash4, then did better after switching to patient buy and hold investing. Ordinary investors tend to move at the worst moments. The Washington Post reported that a record $72 billion flowed out of stock funds in October 20085, in the middle of the panic. Andrea Frazzini and Owen Lamont found that the funds investors pour money into tend to deliver low future returns6.
The objection is right about behavior and wrong about the remedy. The fix is to define in advance what the reserve is for and what would trigger its use, so that deploying it becomes a rule rather than a feeling.
Comparing the two postures
The comparison shows the trade plainly. The fully invested posture wins quietly in ordinary times. The reserve posture wins in the moments that matter most, which tend to be the moments when the gap between good and poor decisions is widest.
Sizing the reserve
No universal number fits everyone, and anyone proposing one is guessing about circumstances. The useful questions are concrete. How much could existing commitments call over the next two years? How long would it take to raise cash from other holdings without selling at a loss? How large is the smallest deal worth acting on?
Holding a deliberate reserve is hardly unusual. The Investment Company Institute reported that total US money market fund assets stood at $7.92 trillion in mid October 20267, money that savers and institutions have chosen to keep liquid. The sum of the answers above is a floor, not a target. Above the floor, the reserve is a choice about how much patience to buy.
Setting the triggers
A reserve without rules tends to become permanent. Before it is ever needed, write down what would justify spending it: a decline of a stated size in an asset class already understood, a particular kind of motivated seller, or a current holding that becomes available on better terms. Write down too what would not justify it, such as a new story, a hot sector or a friend’s enthusiasm. Triggers turn the option into a plan.
Where the reserve lives
A reserve works only if it is available when needed, which rules out holdings that could fall sharply at the same moment opportunities appear. Even cash like products can wobble. During the 2008 crisis, after a money market fund fell below a dollar a share, the Treasury moved to guarantee money market funds to restore confidence8.
The usual candidates are built for safety and access rather than growth. Bank deposits are insured by the FDIC up to $250,000 per depositor, per ownership category, at each insured bank9. Treasury bills run from a few weeks to 52 weeks and pay face value at maturity10. Each carries tradeoffs in yield, access and protection, and the right mix depends on circumstances a general entry cannot know.
Separation matters as much as the instrument. A reserve kept in a distinct account, labeled for its purpose, is harder to spend casually and easier to see clearly. An opportunity fund mixed with everyday spending money tends to disappear into everyday spending.
Verdict
Cash costs something every year it is held. So does a spare tire, and nobody calls a spare tire wasted because the road stayed smooth. The test of a reserve is whether it allowed good action in the one year when acting well mattered, and that test is easy to apply to any portfolio. If the strongest deal of the decade arrived tomorrow, could the investor say yes without selling a holding they would rather keep?
