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Joshua Street

How To Invest Your Pile Of Cash


It would be great if all investors were aware of the concept of zero-based thinking, a framework for making decisions in which you imagine yourself back at the point before particular decisions were made so that you could consider all available information that you now know in order to make the most well informed decision.  Applying zero-based thinking to investing, many investors find it a useful exercise to think how they would invest their money right now if it was all in cash, as opposed to being invested in its current allocation.


For instance, many investors pick a particular portfolio allocation based on opportunity set at one point in time, and then as months and years pass, the portfolio gradually becomes more expensive/risky as the most attractive assets appreciated in value, growing in size relative to the rest of the portfolio, and in the process became less attractive. Considering zero-based thinking, the investor should revisit whether their current allocation is the optimal allocation, given all the current information about asset class valuations, goals, time horizon, etc.  It’s not good enough to just buy a portfolio once and never make any adjustments to the investment allocation; investors should periodically revisit whether they should change their target investment allocation based on both the changing market environment and their unique circumstances.


Ultimately, a target allocation is what the investor would want to hold right now if there were no market frictions. The main problem that many investors run into after setting the optimal target allocation is that trading their investments will have taxable consequences that significantly reduce the benefits of making the shift.  Therefore, these taxable investors who have imbedded gains may use the zero-based thinking framework when determining what the optimal allocation should be, as if all their assets were just in cash right now and able to be invested, even though the practical implementation of their target allocation is effectively limited by investment liquidity, marketability, taxes, and other consequences.


Over the past few weeks, I’ve had multiple people ask me about the scenario of what’s the right thing to do now if currently holding 100% cash.  Having a lot of cash on hand right now provides an interesting situation that makes it much easier to implement a portfolio allocation determined by using zero-based thinking.  I found it to be a fun thought exercise to consider, and hopefully you find my ideas interesting or useful.


My first thought was that the initial question of “what to do with 100% cash” can actually be broken down into two separate questions: “what investments should I own”, and “when should I buy them”.  As with any complicated questions of this sort, the answer is always “it depends…” but I’ll cut to the chase and give some recommendations that I think work well in this specific scenario.  I’ll also include all my assumptions afterwards for reference, since my recommendations entirely depend on which assumptions were used.  Changing any one of the assumptions would likely lead to changes in the recommendations, so please consider these following four recommendations with that context in mind.


  1. Set a long-term target allocation that considers the risk vs reward tradeoff for all asset classes by underweighting risky assets and overweighting assets with the best opportunity set. As of now, this portfolio would be underweight US stocks & bonds, overweight international & EM equities, and overweight alternative strategies.  Revisit the target allocation quarterly to make adjustments based on changes to long-term expected risk & returns.


The first part of the question about which investments you should own is not as hard as the second part about when to buy them, so let’s start by talking about which investments would be a good fit in this situation.  Regardless of the investment landscape, there’s a strong case for being fully invested, especially if in the accumulation phase of life.  Having at least some cash, bonds, stocks, and alternative investments should be a given – it should just be the decision of which asset classes to underweight or overweight based on the current opportunity set.  For instance, a defensible portfolio might significantly underweight US stocks, as well as other assets that are highly correlated to US stocks, right now given expensive valuations.  With the free cash, it may be a good idea to put that money to work in other alternative investment strategies that are uncorrelated to stocks & bonds to reduce drawdown risks in the event of a market crash. A very long story short, I’d recommend investing a significant portion of the portfolio in a handful of mutual fund strategies that each have positive expected returns and act completely unlike each other; doing this produces a portfolio that will likely hold something that performs well in any market.  Revisiting the amount allocated to stocks, bonds, and alternatives periodically would give the chance to shift slowly to decrease the weights of assets that have performed well and increase the weights of assets that are expected to do well in the future.  This is the backbone of our investing philosophy: taking a long-term approach and focusing on small periodic shifts that have meaningful effects on risk and return over full market cycles.


  1. Initially, invest 30% of your cash into the non-equity, alternative strategies that are part of the long-term target allocation.


The question about when to invest is more difficult.  Obviously there’s the simplest option of investing the entire lump sum right now into the aforementioned diversified portfolio that is significantly underweight US stocks & bonds, overweight international & EM equities, and overweight alternative strategies; however, although this lump sum approach would give your investments exposure to markets sooner to prevent missing out on near-term market gains, it doesn’t make sense to do this given the background for why the portfolio is held in cash in the first place.  If the reason for deciding to hold cash at some point in the past was because equity & bond markets don’t have a great opportunity set, then it wouldn’t make sense to dive back into stocks & bonds now after many years of strong performance if they have become even less attractive from a valuation perspective.  If anything, putting a portion of the lump sum of cash to work in a portfolio might make sense if allocated to non-stock investments, especially because their lack of correlation to one another results in positive expected return in almost any environment and very low expected standard deviation when held together and considered as a whole – similar to the feel of holding cash in a sense. For instance, starting by initially investing 30% of the overall cash into the alternative investments to start filling out the long-term portfolio target allocation would be a good start.


  1. With the remaining 70% of cash in your portfolio, periodically invest 5% every two months to get closer to the long-term target allocation.


A better option for when to invest the remaining cash might be to ease back into a fully invested allocation over the coming years based on a combination of two event triggers, the first of which being simple periodic calendar events (a.k.a. dollar cost averaging). At the very minimum, it’s a good idea to dollar cost average into the investments on a regular basis, based on some periodic calendar schedule, in order to reduce the risk of investing at a market top.  One possible way of doing this would be to invest 5% of the portfolio every two months.  Building upon this scenario of investing 30% initially in alternatives and then 5% each quarter into the remaining diversified portfolio that’s tilted towards attractive asset classes, the portfolio would necessarily be fully invested over the course of 3.5 years at the very longest.


  1. Monitor technical momentum price signals to note any shifts in trend that suggest optimal buying opportunities to bring the portfolio closer to the fully invested target. Use these ‘buy signals’ as a trigger to allocate an additional 5% of available cash towards the target allocation of the asset classes with positive momentum.


In addition to doing bimonthly dollar cost averaging, I’d also recommend following long-term trend/momentum indicators as an additional trigger to allow a faster allocation of capital if equities or other risky asset classes present a better opportunity (i.e. when they shift from negative to positive trend/momentum).  This shift to positive trend should ideally be a good ‘buy signal’ after an asset class has already fallen in value, become cheaper/more attractive to own, and finally turned around and is now headed in the positive direction.  Following that buy signal, I’d look to increase that position toward target by at least 5% or more if comfortable with bringing it all the way to the full target allocation.



Here are my assumptions that I used to help frame the discussion and come up with my suggested solution:


  • General Investing Assumptions
    • Long-term valuation indicators matter, and both domestic equities & bonds are not cheap. All else equal, it’s a good idea to have the most exposure to cheap asset classes to either increase the opportunity set for future returns or to decrease the risk of significant near-term losses.  Related to this assumption, markets are inefficient, mostly seen on a macro level, providing opportunities to benefit from increasing or decreasing allocations based on geographic region or asset class.
    • Short-term asset class predictions are junk. No one can reliably predict the performance of any asset class over the next month, year, or few years. If someone actually could look into a crystal ball to see future equity returns, he/she’d never have a losing trade and be the richest person on Earth.
    • Markets tend to go up more than they go down. There will be more time spent in bull market runs than in bear market corrections.  Over long periods of time, it’s better to be invested than to be out of the market.  Expensive markets can easily become more expensive, as we have seen over the past few years.
    • True diversification is important and cannot be achieved with stocks & bonds alone. Since no one knows with a strong degree of certainty how markets will perform over the next few years and since most asset classes & strategies tend to have positive returns over the long-run, it’s important to maintain at least some exposure to all asset classes to enable a variety of sources of return, as well as reduce individual asset class risks.  Adding truly uncorrelated asset classes (with positive expected returns) is one of the best ways to reduce portfolio risk.  Given that the Great Recession of 2008 showed the possibility/likelihood of correlations between mainstream asset classes (i.e. stocks & bonds) going to 1.0 during future bear markets, and also that both stocks & bonds are relatively expensive right now, investors cannot rely on bonds as a ballast in their portfolio if equities plummet.  Other alternative investments that have the ability to perform well, independent of whether stocks or bonds are in a bull market, should be relied upon more heavily during times like these.  For a deeper dive into the benefits of true diversification now, see the paper I wrote titled What Your Portfolio Needs: There’s Simply No Alternatives.
    • There are many different risks to consider with regard to investment portfolios, and there’s no such thing as a totally risk-free investment. Depending on the investor’s life circumstances and investing goals, the investor might be concerned with purchasing power/inflation risk, general market risk, sovereign risk, individual business risk, interest rate risk, duration risk, currency risk, reinvestment risk, etc.  Arguably the most important risk to focus on should be the risk of not being able to accomplish all your life goals with your portfolio, but ultimately determining which specific risks are of biggest concern to the investor is a necessary step in deciding how to dial up or down various elements of the portfolio to adjust those risks.  For instance, increasing the amount of cash in a portfolio may be an effective way to reduce many forms of risk, such as market risk, interest rate risk, or foreign currency risk, but it also has the opposite effect of increasing the risk that the money will lose purchasing power due to inflation or that the portfolio might not be able to achieve the hurdle rate of return to successfully accomplish everything in the investor’s financial plan.  The key thing to note is that making changes to a portfolio allocation will likely change the portfolio risk composition, but that the portfolio is always exposed to risks/tradeoffs.  Deciding on which risks are most important to consider and how they will factor into determining the optimal investment portfolio is a blend of both art & science.
  • Specific Investor Assumptions
    • The investment portfolio is currently 100% cash.
    • The investment portfolio represents 100% of the investor’s liquid net worth.
    • There is only one taxable investment account that holds all the assets, and there are no embedded/unrealized gains that will need to be recognized with making portfolio adjustments.
    • The purpose of these assets is to fund regular retirement spending, which will begin in 10 or more years.
    • There will be no withdrawals from the portfolio until retirement.
    • Contributions/savings will occur regularly until retirement, and will be fully available to invest as soon as they’re contributed.
    • The primary objective of the portfolio is mitigating risk of portfolio loss during severe market corrections (anything more than 20%), with the secondary objective of growth.
    • There are no special constraints regarding off-limits asset classes or strategies, and there are no mandatory investment themes that need to be implemented.
    • The investor’s risk tolerance is ‘moderately conservative’, indicating slightly less tolerance for drawdowns than average
    • The investor’s risk need requires him to take risks that would likely generate at least 5% real returns on an annualized basis in order to afford all life spending goals
    • The investor’s risk appetite is relatively high, due to entrepreneurial spirit and willingness to take action if there’s a good opportunity or deal to put his money to work


I’m sure there can be a counter-argument for most of the General Investing Assumptions, and the Specific Investor Assumptions won’t perfectly account for other business assets or financial accounts owned, financial goals, etc., but these assumptions seem pretty reasonable for the thought exercise.  Changing any one of these assumptions will likely lead to changes in the recommendation.  Going through a comprehensive wealth management process is the way investors should look to nail down additional relevant personal facts/circumstances that would fit into the Specific Investor Assumptions category, in order to ultimately help get closer to the best, personalized recommendation.  For instance, if someone is especially entrepreneurially inclined and opportunistic, it might make sense to consider his/her unique skills and interests to see if a large sum of cash could be used in other creative ways to invest into any of his/her businesses or start new businesses which may have higher expected return, more control/less risk, and higher satisfaction than if invested passively in mutual funds. Regardless of which assumptions might need to be adjusted based on individual investor beliefs and personal details, hopefully this was a good example of how I’d approach the question of how to invest 100% cash.

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The broader finance industry is constantly evolving and providing new challenges for practitioners and end users alike. Acknowledging this fact, the best way to effectively manage your own finances and the finances of others is to become a lifelong student of finance. Josh Street created the Student of Finance blog to share relevant and timely topics that are related to financial planning, investments, and managing wealth.

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The commentary on this website reflects the personal opinions, viewpoints and analyses of Joshua Street and should not be regarded as a description of services provided by his employer or its affiliates. The opinions expressed in this website are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. It is only intended to provide general education about the financial industry. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Any indices referenced for comparison are unmanaged and cannot be invested into directly. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.