Cash Isn't King: Why Investors Shouldn't Sideline Their Money Right Now

February's market sell-off has carried into March, with the S&P 500 posting losses in seven of the past 10 trading sessions. Since hitting its all-time high on Feb. 19, the index has now fallen by 6.23% amid concerns over the impacts of tariffs, overvalued stocks and a potential market correction.

Compounding fears, last month, Berkshire Hathaway CEO Warren Buffett exited positions in two index funds and increased his company's cash position to a record $334 billion.

However, Buffett is not your run-of-the-mill investor, and despite the market's current pullback, conventional wisdom maintains that there could be more to lose than gain from attempting to time the market by selling stocks and sidelining your money.

Here's why investors may want to think twice before increasing their cash positions.

Cash is not king

Bearish investor sentiment is on the rise, registering its highest mark since 2022, and uncertainty continues to linger over the market this year. But Buffett dispelled misconceptions about his cash position in Berkshire Hathaway's annual letter in late February.

"Despite what some commentators currently view as an extraordinary cash position at Berkshire, the great majority of your money remains in equities," he wrote. "That preference won't change."

That message should resonate with investors. In spite of the market's tempered outlook for 2025, history suggests that remaining invested produces the best results. Data compiled by Fidelity shows that investing $5,000 annually in an all-stock portfolio from 1980 to 2023 would have resulted in nearly $5.6 million if investors timed the market perfectly. Even with the worst timing (like buying at the market's peaks before pullbacks and corrections), the end result would still be a sizable $4.2 million.

However, if an investor sidelined that cash over the same stretch, it would only be worth $349,999. And when factoring for inflation's erosive effect on the dollar, investors who liquidated their positions and held cash would actually have lost 3.5% of purchasing power each year — further reducing the value of that sum.

Look to other asset classes

Of course, past performance is never indicative of future results. But they do make an argument against sitting in cash while lending credence to the idea that understanding where to invest — rather than whether to invest — can make the best use of your dollars.

That notion is central for Jordan Rizzuto, managing partner and chief investment officer of GammaRoad Capital Partners, who embraces a proprietary rules-based approach to deciding when to shuffle funds between equities (e.g., stocks and ETFs) and fixed income (e.g., Treasury bills and bonds).

"The strategy measures three key drivers of overall market risk for the S&P 500 on various time horizons," Rizzuto explains. "Each of those measures is either bullish or bearish for S&P 500 exposure. If all three measures are bullish, the strategy will be at its maximum equity exposure. If all three measures are bearish, it will be 100% in [short-dated Treasury] bills."

Those three indicators are based on behavioral, fundamental and trend-based analysis; they combine to form a strategy that works on two levels.

First, it eliminates subjectivity, with funds only rotating in and out of positions when mandated by the measures' well-defined parameters. Second, it embraces diversification among asset classes. Treasurys, for example, are currently offering rates above their long-term averages, providing guaranteed returns and a safe haven for fearful investors who lack confidence in the stock market.

The fallacy of timing the market

For investors weighing equities against cash positions, remaining invested and embracing strategies like dollar-cost averaging can lead to better returns than trying to predict buying and selling opportunities at perceived market highs and lows.

We can use 2020's pandemic-induced market crash as an example. The S&P 500 began falling in late February of that year but bottomed by March 23. Over the following three trading sessions, the index gained around 18%. By mid-August, it was higher than before the sell-off began. The only thing investors had to do was wait it out.

Zooming out, data from JPMorgan shows the value of remaining invested over the course of 20 years. Based on $10,000 invested in the S&P 500 from July 2004 to July 2024:

• Remaining fully invested would have returned 10.5% annually
• Missing the market's 10 best days would have returned 6.2% annually
• Missing the market's 20 best days would have returned 3.6% annually
• Missing the market's 30 best days would have returned 1.4% annually

Another demanding component of market timing is choosing which stocks are capable of outperforming the market (and when they can do so). Instead, for passive investors, index funds offer broad exposure and eliminate that need.

"The old adage that diversification is the only free lunch — I think there's a lot of truth to that," says Rizzuto. "We're subject to our own emotional biases, [and] if you are following an entirely discretionary process ... that's a very challenging way to approach market risk."

There are two other considerations Rizzuto says buy-and-hold investors who remain in the market should factor for: corrections and investment horizons.

"If you are fully invested at all times, you will need to be comfortable with these bouts of volatility and occasionally very significant market drawdowns like we've seen over the last several decades," he says, mentioning the dot-com crash, the global financial crisis of 2008 and the COVID-19 pandemic.

Regardless of whether a correction or bear market is imminent, they will occur as natural functions of the market cycle. Fortunately, research from Hartford Funds indicates that since 1928, the average bull market lasts 2.7 years and returns 115%. The average bear market lasts less than one year and loses 35%.

The second consideration investors need to take into account is their horizon. Rizzuto notes that while equities deliver a better risk-reward ratio over cash, depending on an investor's age, those returns are less likely to be realized if they're not able to remain invested for longer periods.

Stay the course

While nobody has a crystal ball, patience and commitment can go a long way for retail investors. Being mindful of three points during turbulent markets can help you avoid the pitfalls of succumbing to emotion-driven choices:

1. Diversification helps mitigate risk exposure
2. Bear markets do not last as long as bull markets
3. Dollar-cost averaging prevents decision-making based on short-term volatility

"To consider cash versus equities, you have to be intellectually honest with yourself," says Rizzuto. "Do you have a measurable, repeatable way to do that in both directions: Exchanging equity for cash or cash for equity?"

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