Mutual Fund Cash Level

Ah, the bane of so many mutual funds.

Why? Well, funds have big inflows and outflows of capital all the time. Should things go awry in the markets and Joe Consumer panics, Joe usually withdraws his money at the worst time, i.e. right at the bottom of the market...when he should be doing the opposite.

But when Joe wants his dough, Joe gets his dough. So mutual funds have to keep a buffer layer of cash around to accommodate Joe so that if, say, a bad market happens and tons of redemptions happen, juuuust when stocks are stupid cheap, the mutual fund would hate to have to then sell stocks to raise cash to give to Joe. If they did have to sell, they'd likely drive down the price even further and create a mess out of their track records and be a bad experience for the longer-term committed shareholders in the fund who want to hold "forever."

So funds have to schlep around a meaningful cash position all the time. Like 5, maybe 10 percent. And that cash position, in a world where the market goes up on average about 8 or 9 or 10 percent a year, hurts performance a lot. Like...a percent-ish of headwind from holding that cash each year.

That noted, however, some funds choose to hold high levels of cash as a strategic or tactical move. That is, they believe the markets are going to crater, and they're raising cash levels to then strike and buy things after everyone else has panicked.

Over time, though, betting on the markets going down (at least over the last 120 years or so) has been generally a really bad bet...other than in a few short periods when it was oh so right, and you'd have been delighted to have huge cash levels at your funds.