Holding excess cash in anticipation of a downturn? Here’s how to position client portfolios if markets retreat.
If you or your clients have been maintaining significant cash allocations in recent years, you’re not alone. Elevated yields since 2022 have made cash and money market funds unusually attractive, while heightened market valuations and volatility have encouraged patience. Yet, the opportunity cost has been steep: equity markets have surged, with the S&P 500 up more than 80% since its October 2022 trough.
For advisors, the challenge now is helping clients transition from defensive cash positions into long-term investment strategies without falling victim to poor timing or emotional decision-making. Deploying capital during a downturn requires both discipline and structure. Having a predefined roadmap—rather than reacting in the heat of market stress—is critical.
Why so much cash is on the sidelines
The Federal Reserve’s aggressive rate hikes over 2022–2023 created an environment where money market funds yielded 4–5%, drawing a record $7.3 trillion into these vehicles. Roughly $2.1 trillion of that belongs to retail investors, while even institutional giants like Warren Buffett’s Berkshire Hathaway are holding unprecedented levels of cash (nearly $350 billion).
Yet as equity valuations marched higher, many investors were left waiting for an entry point. April’s brief 20% drawdown was short-lived, and the subsequent rebound left cautious allocators sidelined. This dynamic highlights the tension advisors face: preserving capital and waiting for a reset versus missing substantial upside in powerful bull cycles.
The case for a disciplined entry plan
Market timing is notoriously difficult. While it can be tempting to wait for a major correction, the reality is that recoveries often come faster than clients expect. According to Stifel, the average bear market since 1932 has involved a 35% decline lasting about 18 months. But in recent years, drawdowns have been shallower and shorter, making hesitation costly.
That’s why advisors often favor dollar-cost averaging (DCA)—systematically committing capital at regular intervals regardless of market conditions. It helps clients avoid paralysis and ensures steady participation. However, if clients insist on holding reserves until a larger pullback occurs, a tranche-based approach offers a compromise.
Charles Schwab recommends legging into the market in small increments during corrections, while Hank Smith of Haverford Trust suggests becoming opportunistic once markets fall 10%. The key is to act decisively rather than waiting for a perfect bottom. As Smith notes, “Being indecisive about when to get in can result in missed opportunities.”
The S&P 500’s 19.9% decline earlier this year illustrates the risk of hesitation. Within weeks, the index recovered to record highs, posting a 30% rally from April lows through mid-summer. For cash-heavy clients, failing to act meant missing a generational entry point.
How to structure entry points
Advisors may find value in building a tiered allocation plan tied to market thresholds. For instance:
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Begin allocating 20–25% of sidelined cash when the market enters a 10% correction.
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Add another 25–30% if the decline extends into bear market territory (down 20%).
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Deploy remaining reserves in further 5–10% increments, depending on sector valuations and macroeconomic conditions.
This framework ensures clients participate in rebounds while maintaining dry powder if markets worsen. It also avoids the binary “all in” versus “all out” mentality that so often undermines disciplined investing.
What to buy in a downturn
When deploying cash, advisors must carefully consider positioning. Broad diversification remains essential, but certain exposures historically deliver superior rebound potential.
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Diversified equity baskets: Schwab notes that a well-constructed equity allocation can be built with as few as 12 stocks across all major sectors. Advisors should encourage clients to avoid overconcentration and instead emphasize sector balance to capture recovery leaders.
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Quality dividend payers: Bank of America Private Bank highlights dividend stocks as attractive in downturns, offering income stability and downside protection. Dividends provide a cushion and help clients stay invested during volatile stretches.
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Cyclicals and consumer-sensitive sectors: Historically, economically sensitive sectors rebound sharply as recessions end. ETFs such as the Fidelity MSCI Consumer Discretionary Index ETF (FDIS) and the Invesco Dorsey Wright Consumer Cyclicals Momentum ETF (PEZ) offer diversified access.
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Large-cap technology: Despite high valuations, Smith suggests large-cap tech should not be overlooked. These stocks may correct sharply in downturns, creating rare entry points into long-term secular winners. Periodic sell-offs in high-growth names often present attractive buying opportunities for patient investors.
Balancing caution with opportunity
While it’s tempting to wait for “the big one,” advisors know that perfect timing is illusory. More important is helping clients recognize that consistent participation—through DCA, tranching strategies, and diversified entry points—provides the best path to compounding over time.
Goldman Sachs recently warned that correction risks are rising, while Vanguard’s 10-year outlook favors a conservative 70% bond / 30% equity mix due to high valuations. Yet, history shows that cash-heavy investors rarely re-enter at optimal levels. The result is often long-term underperformance relative to disciplined peers.
Advisors should emphasize that a downturn is not something to fear but to plan for. Having cash ready is valuable—but only if it’s paired with a framework that avoids indecision. Helping clients establish allocation triggers, sector priorities, and realistic expectations ensures they can act when markets deliver opportunities.
Action items for advisors
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Review client cash balances: Assess how much of their portfolio is sitting idle and whether it aligns with long-term goals.
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Establish tranche-based reentry plans: Define percentages to deploy at 10%, 20%, and 30% drawdowns, removing emotion from the process.
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Prioritize income and resilience: Incorporate dividend strategies and high-quality equities to stabilize returns.
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Add cyclical and growth exposure selectively: Position for recovery through cyclicals and use pullbacks to reestablish large-cap tech allocations.
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Reinforce the discipline of diversification: Remind clients that no single sector will lead every rebound, and a broad mix enhances success rates.
The bottom line
Cash has been a strong short-term parking spot, but it is not a long-term growth strategy. With markets at elevated valuations and correction risks rising, now is the time to prepare clients for disciplined redeployment.
The most effective approach is not about predicting exact bottoms but about having the structure to act decisively when markets present opportunities. Advisors who can guide clients through this process—turning caution into strategy—will add meaningful value in the next cycle.
