The Cost of Sitting in Cash After a Market Decline

When markets fall sharply, many investors respond by stepping aside and waiting for “clarity” before getting back in. The instinct is understandable: losses feel real, uncertainty feels dangerous, and cash feels safe.

But what does waiting actually cost?

Using nearly a century of daily U.S. Total Stock Market data, we can quantify—precisely and historically—how much return investors have typically missed by sitting in cash after a market decline and delaying their re-entry.

The results are consistent, intuitive, and often surprising.

How This Analysis Works

Rather than using calendar dates, this analysis focuses on drawdowns, which measure how far the market has fallen from its most recent peak.

We identify the moment when the market first enters:

• a 10% drawdown, and

• a 20% drawdown.

These are the points where investors tend to feel the most stress and are most tempted to “wait things out.” From each of those trigger dates, we compare two approaches:

1. Stay fully invested

2. Move to cash, earn 0% while waiting, and then re-enter the market after:

   • 1 month (21 trading days)

   • 3 months (63 trading days)

   • 6 months (126 trading days)

The key metric is the missed return: the portion of the market’s recovery that occurred while the investor was sitting in cash.

After a 10% Market Decline

There have been 31 historical instances where the market first crossed into a 10% drawdown.

What happens if you wait?

Time in cash	Median missed return	75th percentile	90th percentile	Worst case	% of times waiting helped
1 month	−0.4%	4.6%	6.1%	10.0%	52%
3 months	2.7%	9.7%	12.3%	19.0%	35%
6 months	8.3%	18.0%	21.7%	26.3%	39%

Waiting one month after a moderate decline is roughly a coin flip: sometimes it helps, sometimes it hurts. But as the waiting period lengthens, the balance shifts decisively toward missed opportunity.

After a 20% Market Decline

Deep market declines tell a very different—and more consequential—story.

There have been 16 historical instances where the market first crossed into a 20% drawdown.

What happens if you wait?

	Median missed return	75th percentile	90th percentile	Worst case	% of times waiting helped
1 month	6.3%	9.5%	13.0%	19.3%	31%
3 months	7.8%	17.0%	22.8%	41.1%	31%
6 months	12.6%	27.5%	36.8%	48.1%	25%

After severe declines, recoveries often begin earlier and faster than investors expect. As a result, waiting for reassurance becomes especially expensive.

Chart 1: Distribution of Missed Returns from Waiting

This chart shows the full distribution of outcomes from waiting to re-enter the market after a decline.

• Each box represents the middle 50% of historical outcomes

• The horizontal line inside each box is the median missed return

• The zero line marks the point where waiting neither helped nor hurt

Two patterns stand out immediately:

1. The median missed return rises with waiting time. Longer delays systematically increase the likelihood and magnitude of missing the recovery.

2. The downside of waiting is much larger than the upside. Waiting sometimes helps—but when it hurts, the cost can be substantial.

This asymmetry is crucial. The benefit of waiting is limited, but the potential cost grows quickly.

What This Tells Us About “Waiting for Clarity”

Waiting for clarity feels prudent because it reduces short-term emotional discomfort. But historically, it introduces a different and often larger risk: missing the recovery. Three consistent patterns emerge from the data:

1. Recoveries are often front-loaded. A meaningful portion of the rebound typically occurs early.

2. The cost of waiting grows quickly. Each additional month spent in cash materially increases expected missed returns.

3. Severe declines punish hesitation the most. The deeper the drawdown, the higher the opportunity cost of delay.

The Bottom Line

The risk investors fear most is further loss. The risk they experience most often is missing the recovery.

This analysis does not assume perfect timing or predict market turning points. It simply reflects historical arithmetic: waiting for reassurance has consistently carried a measurable cost.

For long-term investors, discipline—not clarity—has been the more reliable ally.

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Dr. Andy Lawson is the principal of Freshfield Investments, a Registered Investment Advisory firm in Plano, Texas serving clients locally and nationwide. Freshfield provides investment management and financial planning as a fee-only, fiduciary. To book a virtual or in-person complimentary consultation, please visit our Contact page.

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Data source: Kenneth R. French Data Library, Tuck School of Business, Dartmouth College

My thanks to David Welch, Citibank and Alexandra Neff, Bank of Texas