What is Money on the Sidelines

Money on the sidelines is cash that is held either in savings or in low-risk, low-yield investment vehicles, such as certificates of deposits (CDs), instead of being placed in investments that have the potential for greater rewards. Investments with higher yield often include stock or bond market products.

However, money on the sidelines avoids risks associated with times of economic or market uncertainty.

BREAKING DOWN Money on the Sidelines

Money on the sidelines describes the amount of funds held in cash, or lower-risk investments, while individuals and companies wait for economic conditions to improve. Economic conditions refer to the present state of the economy in a country or region. The conditions change over time along with the economic and business cycles, as an economy goes through expansion and contraction.

Legendary investor Warren Buffett is known to take advantage of times when most investors are on the sidelines. He will open or add to positions in undervalued companies at bargain prices when prices are low during times of market uncertainty. Buffet has said of his investment strategy, "Be fearful when others are greedy, and greedy when others are fearful.”

Examples of Money on the Sidelines

The equity market sectors and Treasury bonds moving to the downside with increased volume is an example of a market selloff. Money is not moving from one industry sector to another. It is not moving from stocks to bonds or vice versa. The money is being removed to sit on the sidelines.

Holding investing funds on the sidelines can be a safe way to ride out a downturn, even if the move to the sidelines caused that downturn. However, once the market has stabilized and started to move higher, many investors still lose out. Prices may rise as there could be significant amounts of funds pressuring specific sectors or the entire market to the upside as this money is reinvested.

Cash frequently changing hands and active stock buying eventually bid up the stock market. As stock prices move up and cash prices stay the same, the money becomes a smaller part of the asset allocation mix of households and companies. A way to measure this relative dynamic is to calculate the total market value of the S&P 500 and compare it to the total value of money market funds. Another way is to estimate the amount of available cash in individual’s brokerage accounts. 

Margin accounts, or borrowed money to buy stocks, can be employed. Buying stocks with debt works if prices keep rising, but if investors must borrow record amounts to sustain a rally, that does not support the money on the sidelines theory. Money market holdings can continue to change hands to support higher stock prices until the fundamental drivers of the rally run out. As long as interest rates do not rise, earnings continue to grow, and there are no signs of a recession, stock prices and investment may continue to increase. But this is not a result of money on the sidelines.