Why is Warren Buffett Holding Cash?

Warren Buffett, one of the most successful investors in history, is currently sitting on over $300 billion in cash—nearly a third of Berkshire Hathaway’s portfolio. That raises a big question: What does he see that others don’t? More importantly, should federal employees be following his lead when it comes to their retirement planning?

Buffett’s strategy is a masterclass in patience and discipline, but it’s critical to understand the full picture before making changes to your own investment plan.

Market Uncertainty and High Valuations: A Double-Edged Sword

One of the key reasons Buffett is holding so much cash is uncertainty. The financial markets are constantly shifting, and right now, we’re in an environment where stock prices are high relative to their historical valuations.

When stock prices climb too high beyond their intrinsic value, a correction often follows. But here’s the challenge: High valuations don’t always mean a crash is imminent. The market can remain “expensive” for a long time before any major downturn occurs, making it difficult to predict the perfect time to move in and out of investments.

This is why market timing is one of the hardest strategies to consistently execute successfully. Even professionals struggle with it—and for individual investors, it can be disastrous.

While Buffett has a massive cash reserve, he also has billions still invested in stocks. His ability to sit on cash while waiting for better opportunities is different from what most federal employees can afford to do with their retirement savings.

If you were to follow the same approach, you might miss out on years of potential growth. A few lost years may not seem like a big deal, but over the course of retirement, that could mean losing out on hundreds of thousands—or even millions—of dollars in gains.

This isn’t just theory—it has happened before. Allow me to share a horrifying story.

When Intuition Hurts More Than It Helps

Several years ago, I was speaking with a federal employee interested in becoming a client. We began our conversations just prior to the pandemic really affecting the economy.

This individual was in a position of leadership and was very well informed about the situation. As the pandemic began making headlines, they decided to move a large chunk of their portfolio into cash, convinced that a major crash was coming.

We talked through the challenges of attempting to time this, and finally I asked them: “Let’s say you’re right; then what?” I challenged them to think about when they’d be ready to reinvest.

Their response: “Once the markets hit something like 20-30% down, we’ll be ready to get back in. I just need to protect my wealth in the short term.”

They weren’t wrong. The markets plummeted shortly after.

We spoke again shortly after. I asked them: “How are you doing? This is precisely what you were waiting for. Have you reinvested?”

“Thiago, there’s just too much risk right now,” they told me. “We’ve never seen anything like this before.”

I couldn’t disagree. But I reminded them of our conversation, and that the markets had fallen even more in value than they wanted, making this the perfect moment to reinvest.

“Thiago, this is different, there’s just too much risk, and we just don’t have the time to wait it out.” And they decided to stay the course. Fear took over, however well-placed.

As we now know, the markets went on to stage one of the strongest recoveries in history, nearly doubling from its bottom over the next two years. That one decision cost them nearly a million dollars of growth over the period.

As investors, we’re biologically hardwired to protect what’s ours. Our livelihood, our families, our financial independence—remember the palpable fear responses you had as you contemplated your own decisions.

Perhaps you made the right one that time. Will you the next time, when you have more to lose with less time to recover?

Here’s The Math to Back It Up

To understand why market timing is so dangerous, consider this data from Dalbar (2024):

• If you had stayed fully invested in the S&P 500 from 2004 to 2023, you would have earned an average annual return of 11.8%.
• But if you had missed just 10 of the best-performing days, that return would have dropped to 4.6%—less than half.
• If you missed 20 of the best days, your returns would have been wiped out almost entirely—a mere 2.3%. Even inflation would have grown faster than your wealth.

Why is it so hard for investors? Because the best market days often happen right after the worst ones. This means that the moment investors feel most scared is often the best time to deploy cash.

A Smarter Approach: The Bucket Strategy

Rather than trying to time the market, federal employees should focus on a structured portfolio strategy that balances growth with stability. One effective way to do this is through the bucket strategy, which divides your assets based on investment needs and timeframes.

Short-Term Bucket

This bucket is designed for stability and ensures you have enough cash flow to cover your needs without worrying about stock market fluctuations. As a starting guideline, I like to see roughly 5 years’ worth of portfolio distribution needs.

Once you have the amount, you should determine the allocation. All in cash? Of course not. We’re striving for low volatility, fixed income instruments. Some examples might include:

• Cash
• Money markets
• Short-term bonds
• U.S. Treasury
• CDs, etc.

For example, if a federal retiree needs $8,000 per month from their portfolio in the early years of retirement, a five-year reserve would mean setting aside around $480,000 in this bucket.

Long-Term Growth Bucket

On the other end of the spectrum is the long-term bucket. This bucket is designed to outpace inflation, replace spending, and grow your assets over time. The balance within this bucket is determined differently.

To start, investors should consider a time horizon of at least 8-10+ years before touching this bucket. Volatility is the price we pay for long term growth. Volatility is risk in the short term.

Here we want inflation fighting and growth oriented asset classes. Some examples might include:

• Growth stock index funds
• Value stock index funds
• Mid and small-cap
• Global and international stocks
• Dividend-producing investments
• Preferred stock, etc.

Since inflation steadily erodes purchasing power, this bucket helps ensure that your retirement funds continue to grow, keeping up with rising costs. Your life will cost substantially more in 15-20+ years, and your ability to keep your lifestyle depends on this growth.

Middle Bucket

The intermediate bucket(s) are multipurposed. This serves as a bridge between your short-term and long-term investments. It can be structured with a broad range of asset classes, varying on your tax picture, liquidity needs, overall risk tolerance, and other factors.

Over time, you’ll need to adjust for changes such as the start of Social Security income, tax law changes, market shifts, economic conditions, priority changes, liquidity needs, age, and countless other factors.

The key is having a systematic plan for rebalancing rather than reacting emotionally to the world around us. The single best thing an investor can do for their portfolio is to remove their emotions from decisions.

It’s Time, Not Timing, That Matters Most

Warren Buffett can afford to wait years for a perfect buying opportunity—but most “middle-class millionaires” don’t have that luxury.

Having an investment plan for both the ups and downs of the market trumps being led by a world of constant unknowns.

By using strategies like the bucket approach, federal employees can navigate market uncertainty, maintain financial stability, and ensure a well-funded retirement—because it’s not just your money, it’s your future.