Can I keep some money aside to invest during market crashes?

I was having a chat with a friend about having some money set aside for “buying the dip” when there is a sudden market crash. This conversation allowed me to think deeper about this idea and made me realise that keeping such a corpus is nothing but FOMO (fear of missing out) pretending like a legitimate investment idea.

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The downside to having an “opportunistic investment” corpus

• It’s not clear what a “dip” even means, for someone to buy the dip. Let’s say you set aside some money in 2021 for “buying the dip”. In 2026, let’s say the market falls by 15%. Should you buy this dip? If you had invested this money in equity in 2021 itself, your corpus will likely be worth more even after a 15% fall! Should you buy this 15% dip or should you wait for a harder fall?
• Inferring from the previous point, you are actually giving up real gains today for speculative gains in the future. You keep the money liquid and earn low returns with the hope that some day the market will fall very badly. Are you okay with this opportunity loss?
• Let’s say you see the market fall drastically, say by 40%. You go all-in and deploy your entire opportunistic investment corpus in equity. Now, are you sure that the market won’t fall another 25% after you have invested? Opportunistic entry requires knowing where the bottom is (which is unknowable in advance).
• How would you know how long you need to wait before your opportunistic investments give a big yield? When do you pull out and replenish your opportunistic investment corpus so you can be prepared for the next crash? Opportunistic exit requires knowing where the peak is (which is, again, unknowable in advance).

What can you do with excess cash then?

Let’s say you have fulfilled all your goal-based investment targets, but you still have some money left. What can you do with that money? Like everything in personal finance, there is no right or wrong answer here. I’ll go over what I’d personally do, and that might give you some ideas.

1. To make the goal plans more robust, increase expected inflation. If I have assumed an inflation rate of 6%, maybe I can change it to 6.5% or 7%, just to be on the safer side.
2. If it makes sense, increase the goal budget so we can afford a bigger car, a more expensive college education, or a more exotic vacation.
3. If I still have money left over, I’d pick an asset allocation suitable for idle investments. This “idle corpus” is invested based on my risk appetite: a part of the corpus will be in stable investments so I can take the money out if needed; the rest will be in growth assets such as equity.

That’s my strategy. Does this mean I might never buy the dip when there is a crash? To the contrary, I’ll be better positioned to buy the dip than those who are waiting with liquid cash.

Whenever there is a dip or a rally, the asset allocation will get skewed. I’ll know exactly how much money to spend on buying the dips or exactly how much profit to book. If the market continues to fall for years, I’ll continue to buy the dips because the asset allocation keeps changing and more equity is needed to reset it. Likewise, if the market continues to rally for years, I can continue to book profits.

So the bottom line is that if you can pick a target asset allocation that you’re comfortable with, regular rebalancing is all you need to take advantage of market fluctuations. Just make a plan and stick to it.

Picking the right asset allocation is actually very hard. The right asset allocation should remove your worries about excessive loss. At the same time, it should also remove your worries about missing opportunities to buy the dips. Spend your time and energy in figuring out where your sweet spot is. That’ll make you richer and happier than most other investment tactics.