Arthur, this is the most tempting idea in investing. Keep some cash on the side. Wait for the market to crash. Deploy your savings at the bottom. Make a killing on the recovery. It sounds like a plan. It feels like discipline. The data, across 25 years and three different investment types, says something quite different.
The idea. Why it sounds so logical.
Imagine you have €10,000 to invest. The market is at an all-time high. You think: "Surely this is a bad time to buy. I'll wait. Markets always correct. I'll put my money in when they fall 20% and ride the recovery."
This strategy has a name: keeping "dry powder." The image is of a soldier keeping gunpowder dry for the right moment to fire. It feels disciplined. Patient. Smart. Every finance podcast, every investing subreddit, every colleague who dabbles in stocks seems to endorse some version of it.
Here is the problem. While your money sits waiting for the crash:
- The market might go up 30% before it corrects. You miss those gains.
- Your cash is being eroded by inflation (see our letter on why cash loses value).
- The "crash" might be a 10% dip that recovers in six weeks — too fast for you to deploy and benefit.
- When a real crash does arrive, the news is so frightening that most people freeze and do not deploy anyway.
Okay, but surely if I had been sitting on cash during 2008 or 2020, I would have made a fortune buying at the bottom?
Only if you had actually bought at the bottom — which almost nobody does. In March 2020, when markets fell 35% in five weeks, the news was about a deadly global pandemic with no known cure, hospitals overwhelmed, entire economies shut down. Would you really have moved your life savings into the stock market at that precise moment? Most people who had "dry powder" did not. They watched the crash, then watched the recovery, then bought back in when it felt safe again — which was after most of the gains had already happened.
The three investments we tested.
To settle this question with data rather than intuition, we ran a systematic test across 25 years of real market returns on three very different investments. Here is what each one is, in plain English:
A basket of the 1,400 largest companies in the world — Apple, Samsung, LVMH, Shell, Toyota, Nestlé, and so on. When you invest here, you own a tiny slice of the global economy. If companies across the world grow and earn more money, this grows. Period tested: January 2000 – December 2024 (25 years).
A fund that owns the 100 largest companies listed on the Nasdaq stock exchange — dominated by US technology giants: Apple, Microsoft, Nvidia, Amazon, Meta, Google, Tesla. Historically higher returns than the broader market, but also bigger swings. It fell 83% between 2000 and 2002, and more than doubled in a single year (2023). Period tested: January 2000 – December 2024 (25 years).
Rather than buying company shares, this fund lends money to approximately 1,000 US companies and collects the interest. It pays investors a monthly income of roughly 5–7% per year. It does not swing as wildly as equities — its worst crash (2008) was about −18%. This seemed like the perfect candidate for the timing strategy, since idle cash earning 4–5% could almost compete with the monthly income being forgone. Period tested: April 2007 – December 2024 (17 years).
Why test three such different investments? Wouldn't timing work better for some than others?
That was exactly our hypothesis. A bond fund that pays monthly income seemed far more vulnerable to timing strategies than a pure equity fund — the income you forfeit while waiting is very real and very measurable. If timing was going to work anywhere, it should work there. Testing three very different assets was the only way to know whether the result was a quirk of one investment type or a genuine principle. The answer, it turns out, is a principle.
What we tested. Every combination.
The strategy works like this. Instead of investing everything immediately, you hold back a portion in cash — 5%, 10%, or 20% of your portfolio. You wait. When the market falls a certain amount from its all-time high — your trigger level — you deploy all the cash. You ride the recovery. When the market returns to its previous high, you sell back to restore the cash reserve. Repeat.
We tested every combination of cash reserve (5%, 10%, 20%) and trigger (market must fall 5%, 10%, 20%, or 30% from its all-time high before you deploy). Idle cash earned the actual central bank interest rate for that month — so in 2023–24, for example, cash was earning over 5% annually. No hidden assumptions.
Here is how to read the scenarios:
You invest €100 on 1 January 2000. You never touch it. You reinvest all dividends. You ride every crash and every recovery without changing anything. After 25 years you have €344 (MSCI World).
You invest €90 and keep €10 in cash, earning interest. You wait. When the market falls 20% from its high, you deploy the €10+interest into the market. You wait for full recovery, then sell back to restore your 10% cash cushion. After 25 years you have €278 — versus €344 if you had simply stayed invested. The timing strategy cost you €66, or 19% of your final wealth.
The results. Every strategy. Every asset. The same winner.
| Strategy | End value | Annual return | You lost | Why |
|---|---|---|---|---|
| 100% invested | 344 | 5.10%/yr | — | Winner, always |
| 5% cash / deploy at −10% | 322 | 4.83% | −22 | 5% idle too often |
| 5% cash / deploy at −20% | 308 | 4.62% | −36 | Trigger fires rarely |
| 5% cash / deploy at −30% | 296 | 4.44% | −48 | Years waiting |
| 10% cash / deploy at −10% | 289 | 4.33% | −55 | Bigger drag |
| 10% cash / deploy at −20% | 278 | 4.16% | −66 | Compound loss |
| 10% cash / deploy at −30% | 263 | 3.94% | −81 | Idle through recovery |
| 20% cash / deploy at −10% | 258 | 3.86% | −86 | Severe drag |
| 20% cash / deploy at −20% | 244 | 3.64% | −100 | Lost 100 points |
| 20% cash / deploy at −30% | 228 | 3.40% | −116 | Worst of all |
Notice the worst result: waiting for a 30% crash with 20% in reserve ends up with €228 — vs €344 for staying invested. That is a gap of €116 on every €100 you started with. The most "patient" strategy destroyed the most value.
Three reasons the strategy fails. Explained simply.
- The opportunity cost is invisible but ruthless. While your cash sits waiting for a 20% crash, the market might rise 40%. You missed all of that. And when the crash finally comes and erases 20% from a market that rose 40%, you are still behind the person who was always invested. Waiting is not free. It costs you every month, in gains you did not make.
- The round trip gives you almost no advantage. Here is the exact sequence: you hold 10% in cash → market falls 20% → you deploy → you are now 100% invested → market recovers to old high → you sell back to 10% cash. During the entire recovery phase, you were 100% invested — exactly the same as the person who was always in. The only "advantage" you had was buying a fraction more shares at a lower price. That fraction never compensates for the months or years of cash drag before the trigger fired.
- When the crash arrives, humans freeze. This is the most important reason, and no backtest can fully capture it. When markets fall 30% or 40%, the news is terrifying. Banks are collapsing (2008). A global pandemic with no cure (2020). Every commentator says it could go lower. Your instinct — built by millions of years of evolution to avoid danger — says: wait. Most investors with cash reserves did not deploy in March 2020. They deployed in June or September, after the recovery was already well underway. The strategy that works on paper falls apart in the real world precisely when it matters most.
What about professional investors? Surely they can time the market?
Very few can, and even fewer can do it consistently. Studies consistently show that the majority of actively managed funds — run by professional investors with research teams, Bloomberg terminals, and decades of experience — underperform a simple index fund over 10 years. The ones who beat the market one year often fail the next. Timing the market is genuinely one of the hardest things in finance. If professionals with every possible tool and information advantage mostly fail at it, the assumption that you or I will succeed is optimistic at best.
What to actually do when markets crash.
Crashes will happen. The MSCI World fell 57% in 2008–09. The Nasdaq fell 83% between 2000 and 2002. The whole market fell 35% in five weeks in March 2020. These events are certain to repeat in some form during your investing lifetime. Here is the playbook.
The simple rule for all market conditions
| Market condition | What to do | What not to do |
|---|---|---|
| At an all-time high | Invest as normal | Wait for a pullback |
| Market falling | Keep investing monthly | Sell to "protect" gains |
| Full crash (−30%+) | Hold, keep investing, rebalance | Sell, wait, hoard cash |
| Recovery | Stay invested | Wait "until it settles" |
| Always | 100% in your target allocation | Keep "dry powder" |
Strategy results based on Ka3 Invest proprietary backtesting using real monthly return data. MSCI World (USD price return index, Jan 2000–Dec 2024). Invesco QQQ ETF (Nasdaq-100, total return with dividends reinvested, Jan 2000–Dec 2024). iShares HYG ETF (US High Yield Corporate Bond, total return with dividends reinvested, Apr 2007–Dec 2024). Idle cash earns the actual Federal Funds rate each month. This page is for general information only and does not constitute investment advice.