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 yields often include stock or bond market products.
- Money on the sidelines refers to investment money that is held in either cash or low-risk, low-yield investments, as opposed to higher-yield investments, such as stocks.
- Investors keep money on the sidelines when the markets are experiencing a downturn or the forecast for the economy looks negative.
- Traditional investments in keeping money on the sidelines other than cash include certificates of deposits (CDs) and money market funds, both of which earn little interest.
- Investors can keep their money "safe" and avoid losses by having their money on the sidelines; however, they can also miss opportunities to buy investments on the cheap before prices go back up.
- A way to measure the dynamic between money invested in higher-yielding securities and lower ones is to calculate the total market value of the S&P 500 and compare it to the total value of money market funds.
Understanding 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. Money on the sidelines avoids risks associated with times of economic or market uncertainty.
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 expansions and contractions.
Many investors seek to keep their money "safe" in times of market uncertainty when investing in certain higher-yielding financial products could lead to losses. Instead, investors choose to invest in low-risk securities that will provide a small, yet positive return, and avoid the volatility and large losses of an unstable market.
Some investors, however, do not keep money on the sidelines when times are bad. 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 during times of market uncertainty. Buffet has said of his investment strategy, "Be fearful when others are greedy, and greedy when others are fearful.”
Money on the Sidelines Cycle
When investments in stocks and bonds decrease in large volumes, it is an example of a market sell-off. Money is not moving from one industry sector to another nor is it moving from stocks to bonds or vice versa. The money is being removed to sit on the sidelines.
Holding investment 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 lose out. Prices may rise as this money is reinvested, resulting in investors missing the opportunity of buying in before prices go back up.
Active stock buying eventually bids up the stock market. As stock prices move up and cash prices stay the same, cash becomes a smaller part of the asset allocation mix of households and companies because investors move money on the sidelines into an improving market.
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. Money market funds earn very little interest. Another way is to estimate the amount of available cash in an individual’s brokerage accounts.
Margin accounts, or borrowed money to buy stocks, can also be employed in moving money on the sidelines back into the market. 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.