Evaluating the Opportunity Cost of Moving to Cash During Market Volatility

The markets have been experiencing an increased amount of volatility as we enter the second quarter of 2025. The current catalyst is President Trump’s latest tariff announcement and the possibility for reciprocal tariffs from our trade partners.

If you’re curious about how tariffs might influence inflation, the broader economy, or your portfolio, we break it down in our recent blog: [How Tariffs Impact the Economy](https://archive.summitfc.net/what-are-tariffs-and-how-do-they-affect-inflation-and-investments/).

Further, the most recent updates have caused the stock markets to drop further, and we have seen this type of movement tends to spook investors. Some may even consider selling their investments and moving to cash.

We explore this topic in more depth both in this article and in our YouTube video, “[Opportunity Cost of Cash](https://www.youtube.com/watch?v=tNGwj-IT7w0).” In the video, we discuss how moving to cash during periods of market volatility may feel like a safer choice, but it can come with long-term opportunity costs that impact overall investment performance.

Real Cost of Moving to Cash

Moving to cash may be able to avoid downside risk, but it also causes investors to miss the upside potential as well. Missing out on the potential upside would be considered the opportunity cost of moving to cash.

It is the tradeoff that you are willing to forego in order to prevent further downside. However, in our experience, this sentiment from the average investor may actually indicate that emotions are at the extreme and a potential reversal may be coming.

No one knows what will happen next, but extreme sentiment could potentially be a bottom or top indicator, as we discussed in our previous blog: Fear vs. Greed Index.

Case Study: JPMorgan’s Data on Market Timing

JPMorgan releases their Guide to Retirement periodically and their current 2025 version has a very insightful graphic that we wanted to share.

Essentially, this chart shows the impact of missing the best days in the market, which is what could happen if you decide to sell and move to cash. From January 3, 2005 through December 31, 2024 the S&P 500 would have turned $10,000 into $71,750 and this is about a 10.4% annual rate of return. If you missed just the best 10 days during that period, you would have earned only 6.1%.

This underperformance is even greater if you missed the best 20, 30, etc. days of the market. If you move to cash, you risk potentially missing some of the best days.

Best Days Follow the Worst Impact of being out of the market

To further stress this point, JPMorgan includes a few additional statistics:

7 of the 10 best days actually occurred within the two-week period following the 10 worst days.
Also, even more specifically, 6 of the 7 best days occurred right after some of those worst days.

For example, the second-worst day of 2020 was directly followed by the second-best day of 2020. These three statistics highlight that if the market experiences a steep drawdown, there is the potential for a steep rebound shortly, if not immediately, afterward.

Why Long-Term Participation Matters More Than Perfect Timing

Simply put, we believe that if you did not miss the downside, then you likely cannot afford to miss the upside of the market as well.

And even if you did miss the downside, participating in the upside would further compound your investments as you participate in what could be some of the best days for the market.

As we always say, no one knows what will be happening to the markets next. This is why we always recommend meeting with your personal advisor to discuss your investments and whether or not they believe any changes are prudent based on the recent market movement.

To learn more about how emotions can influence financial decisions, visit our recent blog post: Behavioral Finance.

The Opportunity Cost of Moving to Cash – Key Takeaways

Recent market volatility has clients worried about their investments and debating whether or not they should move to cash.
Moving to cash may be able to avoid downside risk, but it also causes investors to miss the upside potential as well.
Even missing a few of the best days in the market can have detrimental impacts on the long-term rate of return.

Speak With a Trusted Advisor

If you have any questions about your investment portfolio, retirement planning, tax strategies, our 401(k) recommendation service, or other general questions, please give our office a call at (586) 226-2100.

Please feel free to forward this commentary to a friend, family member, or co-worker. If you have had any changes to your income, job, family, health insurance, risk tolerance, or your overall financial situation, please give us a call so we can discuss it.

We hope you learned something today. If you have any feedback or suggestions, we would love to hear them.

Sincerely,

Zachary A. Bachner, CFP®

with contributions from Robert Wink, Kenneth Wink, James Wink and James Baldwin,

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