Why Holding Cash Might Be the Smartest Move Sometimes
When safe government debt pays 4 percent, cash stops being a drag and becomes an allocation with a job.
Most commentary treats cash as the absence of a decision: the money you have not invested yet. We think that is the wrong way to read it, and 2024 is the clearest example. On 31 December 2024, Berkshire Hathaway closed the year with about $334 billion in cash and short-term U.S. Treasury bills, roughly double the $167 billion it held twelve months earlier, and most commentators called it Warren Buffett bracing for a crash. In his 2024 shareholder letter he said the opposite: the cash grew mostly because short-term government debt finally paid a real return, and the great majority of shareholder money still sat in shares. That was a deliberate position earning a real yield, not a market call.
For thirteen years cash paid nothing
A Treasury bill is short-term debt issued by the United States government, the safest place a large investor can park money for a few months; its yield is the annual return for holding it. From the 2008 financial crisis until early 2022 that yield was close to zero. The 3-month Treasury rate finished December 2020 at 0.09% and fell to 0.01% by April 2021, according to the U.S. Treasury daily yield curve. A million euros parked in Treasury bills for a year earned a coffee, and the real cost of holding it was the entire equity rally you missed. With cash priced like that, being fully invested was not a view, it was the only sensible default.
That changed in 2022. The same 3-month rate rose to 0.52% by the end of March 2022 and reached 5.56% by the end of August 2023; by the close of 2024 it was still 4.37%. For the first time since 2007, a retail investor holding cash earned more in interest than the dividend yield on a broad share index, which sat near 1.3% for the S&P 500. Our view is that this is the point where cash changed category: it stopped being a guaranteed drag and started paying you to wait.
What a "sea change" actually means for you
Howard Marks, co-founder of Oaktree Capital, called this shift a sea change in his memo of 13 December 2022. The phrase sounds grand; the mechanism is simple. When safe debt pays almost nothing, investors are pushed into shares and riskier credit to earn any return at all. When safe debt pays 4 to 5 percent, that pressure is gone. In the Sea Change memo Marks wrote that investors "no longer have to rely as heavily on riskier investments to achieve their overall return targets," and that the base interest rate over the following years was more likely to average 2 to 4 percent than 0 to 2 percent. In plain terms, when the safe alternative pays you again, you can demand more before accepting risk.
For a European holding a world equity fund this is concrete. When cash earned zero, any of it was a pure drag and full investment was the only answer. When cash earns 4 percent, a cash allocation has its own return and its own job. We think that is the right question to carry into the rest of this piece: not "why would I ever hold cash," but "how much, and what is it for."
The "just invest now" research does not say what people think
The study most often used to argue against holding cash is Vanguard's Cost Averaging: Invest Now or Temporarily Hold Your Cash, published February 2023. Over 1976 to 2022, putting a lump sum to work immediately beat spreading it in over several months 68% of the time, and the line most readers take away is: do not sit in cash, deploy now.
Read the rest of the paper and that reading does not survive. It compares two strategies that both fully invest the money inside a year. It does not test cash held deliberately for years while an investor waits for cheaper prices, which is what Berkshire actually did. The same study reports that spreading the money in still beat staying permanently in cash 69% of the time, and the lump sum beat staying in cash 70% of the time. That is a case against never investing, not a case against a planned cash position held by someone who has judged the prices on offer not worth paying. It is also worth being clear about who promotes the simpler reading. A fund manager earns fees on money that is invested, not on cash a client holds outside the fund, so the industry has a built-in reason to frame any cash balance as a mistake rather than a position. We do not.
The paper also answers the harder question. In the worst roughly third of one-year windows, gradual investing won, because shares fell after the lump-sum date. Whether the 68% trade is worth taking depends on the price you are buying at. One gauge makes that concrete: the Shiller CAPE ratio, the price of the US market divided by its average inflation-adjusted earnings over the past ten years, so a high reading means shares are expensive against their own long-run earnings. It sat near 38 in early 2025, more than double its long-run average of about 17 since 1881, according to Robert Shiller, online data. Starting that far above its own history, we weight the minority of windows where waiting wins more heavily than the headline 68% on its own suggests.
Where the money actually went
The institutional record cuts against the idea that cash is for the timid. Money market funds, pooled funds that hold only short-term debt such as Treasury bills, took in record sums once yields rose. Their total assets reached a record $7.03 trillion in early March 2025, with $2.84 trillion held by retail investors and $4.19 trillion by institutions, according to the Investment Company Institute. Trillions moved into cash-like positions during the same stretch in which global share indices rose.
The managers who actively allocate went the other way. In the Bank of America Global Fund Manager Survey of 6 to 12 December 2024, average cash fell to 3.9% of assets, the lowest since June 2021, low enough that the survey's own rule flagged it as a contrarian sell signal (BofA Global Fund Manager Survey, December 2024, via Mace News). So the picture splits cleanly: cash held in money funds for its yield hit an all-time high, while the cash managers keep as dry powder for buying shares hit a multi-year low. Both groups were acting on the same 4 percent rate, for opposite purposes.
What this means for your own portfolio
Cash is a position the same way your MSCI World ETF is a position. It has a yield, a tax treatment, and an opportunity cost, the return you give up by not holding shares instead. We do not think the right amount is zero by default, and we do not think it is as much as fear dictates. It is the amount that lets you keep following your own plan when prices fall, instead of selling because you have no buffer and then missing the recovery because you spent it on the way down.
How much of your portfolio is in cash today because you chose that allocation on purpose, and how much is there only because you have not yet decided where else it should go?
