Should a middle class person emulate a very wealthy investor for % of cash hold?

Absolutely. Everyone should have an "emergency fund" of some sort. Many advisors recommend holding 3 to 6 months of expenses in cash as an emergency fund. There are many reasons for this:

• It reduces the amount of debt that you incur (and interest you pay) in the event of an emergency
• Less shock on your budget
• Peace of mind

You can choose to use a larger or smaller amount for your emergency fund based on several variables:

• Stability of employment
• Amount of discretionary spending in your budget
• Amount of debt (some recommend that you keep a smaller emergency fund until debt is paid off)

In addition, if you have a fully-funded emergency fund and no debt, then keeping some of your investment portfolio in cash can be beneficial if you want to look for buying opportunities, but that cash incurs an opportunity cost in bear markets since it's not earning return that your other investments are. That's one of the reasons why timing the market is not a viable strategy.

As a side note, I would not necessarily take a major corporation's financial strategy (Berkshire Hathaway has the cash, not Warren Buffett personally) and apply it to personal finance.

Having more liquid cash would never really be considered a bad idea, but holding to buy into a low market has its risks. While it's definitely a strategy you could employ, the thing is that it would be trying to time the market, which is based on being lucky. No one knows if a recession is going to happen soon. If it was actually imminent, the market would have already reacted. There is a chance that money could sit and do nothing as the market continues to grow for many more years, missing out on potential gains and end up not being worth it.

Typically, the optimal strategy has been to dollar-cost average into index funds and just ride it out through the highs and the lows; it'll average out.

I'd first suggest you read another question here, Is it true that, “just ten trading days represent 63 per cent of the returns of the past 50 years”?. Then, I'd suggest you consider two questions. How would you react if the market continued up? Another 30-50% from here. Or, if you are correct, how will you know when to get back in?

What you propose sounds a bit like market timing, which is a proven way to under-perform.

An alternative, and way to avoid the 'timing' label is asset allocation. One decides on the mix, say 75/25 stock/bond (note, those more sophisticated than I claim to use far more asset classes, but of course, my 'stocks' is a catchall for any equities, you can choose foreign/domestic, different cap, etc. And bond to me means any bonds, cash, CDs, etc). As the market rises, you might see the mix looks like 80/20, and that's the time to sell enough to get back to 75/25. On a huge drop, a bit of that cash buys more shares. Decide on an algorithm (set of rules) and stick with it.

I've said, Personal Finance is just that, personal, and there is no "one size fits all" plan that's perfect. I'll disclose. Until we retired, I was happy to be fully invested. 100% in a near-zero cost S&P. This was 2012, and I realized a crash would be bad, so by the end of '13, we decided a mix of 75/25 was probably good for us. With spending at 5% or so of retirement assets, the '25' meant 5 years worth of spending money, 5 years to recover from any downturn. Now, to your concern of the recession coming soon. The yield curve inversion was a strong sign, and enough for me to recently shift to 70/30. I'll pay attention, and possibly go 65/35, but that would be it. 7 years (for us, just sharing details) bridges the gap to (a) health insurance flipping from private to medicare (b) mortgage gone and (c) social security kicking in for the wife. This is all to say that any percents or ratios are moving targets, budgets change, as does income.

In the end, you need to have discipline and ask "how would I feel if this was the wrong decision?" I've listened to people say that my "100% invested" in stock was irresponsible, yet, they never seemed to come out ahead by trying to market time.

No.

Keep only the money you can afford to temporarily (as in for the next 20 years) go down in value in stocks.

Besides, if the market goes down, how do you know the downturn has ended? Downturns can be as large as 80%. If you don't know, then if you can't afford to lose the money right now, you can't afford to lose it when the market has gone down 30%.

The best return will be made by putting all you can afford into stocks. For someone not close to retirement age, this means all of the money, sans an emergency fund. How large the emergency fund will need to be is dependent on individual circumstances.

No. Emergency funds have been discussed in other answers — but note that an emergency fund is based on spending, not on assets. A rich person could live on their money longer than an average person and thus should have a lower percent of their money in an emergency fund.

Furthermore, the more you have in stocks the better your overall return. A rich person can afford a bigger hit percentagewise and thus doesn't need to play it as safe as a middle class person.

Berkshire Hathaway's huge pile of cash is a separate issue — Buffett only buys what he considers value. He's got the skill to do that sort of thing, the average person doesn't.

People like Buffett don't do this because they're extremely wealthy, they do it (and became extremely wealthy) because they have experience, judgement, and a history of results which you don't have. It's not because you're middle-class, it's because you haven't already had the opportunity, determination, and outcomes to have received the experience of decades of hard-won results.

I mean, "buy on the dips" isn't a bad strategy and does require ready liquidity, but depending on how much you reserve and what kind of luck you have with judging what's a buyable dip, the opportunity cost of maintaining that cash reserve and leaving it un-invested might yield less performance than a conservative investment plan which leaves "timing the market" 100% off the table.

The other thing is, Buffett isn't going to deploy that cash into "the market" when it dips. He's going to deploy it into specific assets he's already watching for the chance to acquire it at a bargain price.

There are two separate issues here: emergency ("rainy-day") funds, and cash as an investment. The pots may overlap a bit.

On the former front, the less wealthy one is, the greater the percentage of one's wealth should be for emergency (or unexpected contingency) use. It doesn't have to be cash, but some of it does, and the liquidity of the rest has to be high. Shares in large blue-chip companies don't cost much to sell and you'll have cash to spend within days, although it's a risk that events may require you to sell into a really bad bear market. Ditto large investment trusts (closed-end market-traded, NB not open-ended funds!). A property is illiquid, and shares in a small company will have a large bid-offer spread even if you don't own a sufficient percentage of its stock to be illiquid. Such may be good long term investments, but you can't rely on selling them to get cash in mere days.

Today, cash as an investment is a guaranteed-lose investment. Interest rates are less than inflation. However, that's a small loss per annum. It also offers a future probable opportunity, that of being able to jump in and buy a market crash or correction. Especially so, if like Warren Buffett, you might be looking to make huge loans or to buy whole companies in a market where liquidity has dried up and interest rates have sky-rocketed (like during the last financial crisis). If the end of the world proves not to be nigh, you win handsomely when some sort of "normal" is re-established. If not, you still have your personal rainy-day fund, sufficient to save your physical skin from anything short of WW3.

No.

1. Buffett likely doesn't have cash, he likely has cash or cash equivalents. The slight difference being that he likely won't be exposed to inflation. I would assume that most of it is in government bonds with differing maturities.

2. Buffett doesn't think that there are good enough buying opportunities in the market right now (for over a hundred billion dollars). You can still invest in companies with a market cap of $10 billion or even $1 billion.
   Also you could just buy an index fund since nothing in your question indicates that you're looking to buy individual stocks. A well diversified index fund (S&P 500 for example) is likely a far better investment than having cash lying around. As the accepted answer says you shouldn't try to time the market. Having cash in case the market drops is obviously trying to time the market.

3. It seems like a practice in futility to pick and choose parts of an investment strategy from a legendary investor without also practicing everything else they do with the same expertise. So until you get to be as good as Buffett at evaluating whether or not a stock is a good buy, I don't see how blindly following his practice on having cash lying around is a good idea.

Lots of good answers here but I wanted to add one other piece. To say Berkshire Hathaway is holding funds for "when the market goes down" is a big oversimplification.

Berkshire is holding funds until good opportunities become available. Berkshire has teams of analysts who independently determine the value of companies, and they'll identify opportunities in the market based on those values.

If there was a general downturn, many such opportunities might present themselves, but so can these opportunities present themselves if a single stock drops even while rest of the market climbs. It's all tied into the underlying value of a company, vs how the market happens to be valuing that company.

This is the difference between trying to time the market, and value based investing.

Just because Berkshire doesn't see good value for that money right now, doesn't mean they are predicting a crash.