This article is adapted from a recent episode of the Scholar Financial Advising podcast. Listen here to hear the full discussion.
A listener asked: “I keep a large portion of my wealth in cash because of market uncertainty. Am I missing out on bigger opportunities?”
This is a common situation, especially in markets like the one we’re in now. After a sharp 20% drop early in the year, the market has rebounded. With volatility still fresh in people’s minds and cash yielding 4 to 5 percent in money markets, holding onto cash can feel like a safe bet. But the challenge is what happens next.
Markets tend to rise as uncertainty fades. Unfortunately, many investors wait until things feel more stable, by which time the market is already up significantly. This creates a frustrating dilemma: you’re finally comfortable investing again, but now you’re buying in at higher prices than when you pulled out.
Why Investors Get Stuck in Cash
This pattern is rooted in how markets react to fear. When there’s uncertainty, volatility increases, and people exit the market. But when clarity returns, prices rise quickly. Those who sit in cash often miss that recovery window.
So – yes, you might be missing out on opportunities by sitting on the sidelines. But jumping all in at once comes with its own risk, especially if the market drops immediately after you invest. That’s where sequence of return risk comes in, and it’s exactly what dollar cost averaging helps address.
What Is Dollar Cost Averaging?
Dollar cost averaging is the strategy of spreading out your investment over time instead of putting everything into the market at once.
Imagine you have $1 million in cash. Investing it all tomorrow could work out… but what if the market drops 20% the next day? That’s the fear that holds people back. Instead, you might invest $100,000 per month over 10 months. This smooths out your entry points and reduces the emotional and financial impact of short-term losses. This approach doesn’t eliminate risk, but it helps avoid the regret of bad timing. It also introduces discipline and structure to your re-entry strategy.
The Tradeoff: Waiting Has a Cost
It’s important to remember that, historically, markets trend upward. The S&P 500 has delivered positive average returns over the long term. Statistically speaking, investing today is more likely to yield better long-term results than waiting. That’s why people say, “The best time to invest was yesterday.” However, if valuations are high (say, based on price-to-earnings ratios) it might make sense to average in more slowly. There’s some credibility to factoring that into your timing, but the bigger question is often about liquidity and your personal situation.
How Much Cash Do You Actually Need?
This is the more practical side of the conversation. If you have a sufficient emergency fund and access to other liquid assets, then investing a lump sum, or averaging it in more quickly, may be fine. But if that $1 million is all the cash you have, and a 20% drop would jeopardize your financial future, you need to approach it differently. In that case, some of the funds should remain in cash. For example, you might hold a portion aside as your liquidity buffer and invest the remaining portion gradually. That approach protects your near-term needs while putting the bulk of the money to work.
Consider the Time Horizon
The importance of dollar cost averaging also depends on how soon you’ll need the money. If you’re approaching retirement, the few years before and after your retirement date are the most vulnerable. That’s the “danger zone” for portfolios, when sequence of return risk can have the greatest impact.
But if the portfolio is meant for longer-term goals, like generational wealth, future inheritance, or a foundation, then the urgency fades. In that case, the time horizon may stretch 30, 50, or even 100 years. Over those spans, whether you invested the money today, or spread it out over a few months won’t make much difference.
Bottom line: Dollar cost averaging can be a helpful way to reduce timing anxiety and mitigate short-term risks, especially if you’re sitting on cash and unsure how to re-enter the market. But it’s most useful when liquidity is tight or your time horizon is short. For long-term goals, getting invested—one way or another—matters more than when.
Want to hear the full discussion? Listen to the podcast episode here.