The Most Expensive Button in Your Brokerage Account

By Dejan Ilijevski

It may be the one labeled sell.

Oil is volatile. Reports say SpaceX has confidentially filed for an IPO at a possible valuation as high as $1.75 trillion, while OpenAI is reportedly preparing for a potential public listing. The AI trade itself looks tired. The latest jobs print was soft, or hot, depending on which revision you trust. Someone on cable is telling you a recession is already here. Someone else is telling you the next leg up has already started.

This is not an unusual year. This is what many years feel like from the inside. And the instinct it produces in many investors — raise cash, wait for the picture to clear — has often been costly for long-term investors.

To be clear up front: cash itself is not the problem. Every durable plan requires liquidity for emergencies and known expenses. But there is a massive difference between cash-as-a-buffer (planned) and cash-as-a-bunker (reactive). One protects your plan; the other undermines it.

The problem this piece is about is narrower: using cash as an emotional market-timing tool, moving in and out of equities in reaction to headlines.

This is the mirror image of the argument I made in SpaceX, OpenAI, and Anthropic: What the IPO Headlines Miss. That piece was about chasing performance at the top of the value-creation curve — retail investors buying into a SpaceX or an OpenAI after venture and growth-equity investors had already captured much of the prior decade’s gains.

This one is about the other end of the same instinct: fleeing the market during periods of stress, often just before the next round of value creation begins.

Same behavioral bias, opposite directions. Both can be expensive.

The Average Cost of Bad Timing

Morningstar publishes a recurring study called Mind the Gap. It measures the difference between what funds return and what the average investor in those funds actually earns, based on the timing of investor cash flows.

Recent Morningstar reports have shown an investor-return gap of roughly one percentage point per year over the trailing decade. DALBAR’s studies, using a different methodology, have often shown larger investor-return gaps, though the size varies meaningfully from year to year.

A percentage point a year sounds trivial. It is not.

As a simple illustration, consider $100,000 compounded over 30 years:

That 1.1 percentage-point annual gap would reduce the ending value by roughly $200,000 in this hypothetical example.

This is not a forecast. It is not a promise that any portfolio will earn 7%, or that any investor will experience this exact gap. It is simply a way to visualize how a small annual behavior gap can become a large lifetime dollar difference when compounded over decades.

Where the Gap Comes From

The behavior gap does not primarily come from one bad headline or one bad fund pick. One of the documented drivers is timing: investors tend to add money after strong performance has already occurred and pull money out after painful declines have already happened.

Fund-flow data have repeatedly shown heavy equity outflows during periods of market stress, including the global financial crisis, the March 2020 COVID selloff, and the 2022 bear market. Inflows often arrive later, after recoveries are already underway.

Much of the behavior gap is a timing story. For many investors, the cash button becomes the mechanism.

A Stress Test: One Specific Market Cycle

The average behavior-gap data are the main point. But a single market cycle can make the mechanics easier to see.

The dates below are not chosen to show an average outcome. They are chosen because they represent a severe stress test: investing at the October 2007 market peak, selling near the March 2009 bear-market low, and waiting until the prior high was recovered before reentering. The purpose is to make the order of magnitude visible, not to suggest this is what most investors experience.

Consider a hypothetical investor who put $100,000 into the S&P 500 at the October 2007 market peak — one of the most difficult entry points of that cycle.

If the investor did nothing — held through Lehman, the 2009 bottom, the European debt crisis, COVID, 2022 — and reinvested dividends along the way, the portfolio would be worth approximately $630,000 by May 2026.

If the investor sold in March 2009, waited in cash until the market reached new highs in March 2013, and then reentered, the portfolio would be worth approximately $215,000 by May 2026.

That one hypothetical round trip through cash would have created a stress-test gap of roughly $400,000.

These figures depend heavily on the specific dates used, S&P 500 Total Return Index assumptions, dividend reinvestment, and cash-return assumptions. Different dates or assumptions would produce materially different results.

Why “Going to Cash Until Things Feel Safer” Is Hard

Cash used as a timing tool — rather than for liquidity or spending needs — carries two costs that do not always show up clearly on a statement.

First, there is inflation drag while cash sits idle. Second, there is the reentry problem: the investor eventually has to decide when conditions are “clear enough” to come back in.

That second decision is often the harder one. Markets rarely announce that risk has passed. Recoveries often begin while the headlines still look terrible.

Behavior-gap studies suggest many investors have struggled to improve outcomes through repeated market-timing decisions across full market cycles. Morningstar’s annual Mind the Gap reports are one frequently cited source on this topic.

What a Plan Actually Does

The job of an advisor in 2026 is not to predict what oil, AI, or the labor market will do next quarter. It is to build a plan whose discipline does not depend on knowing those answers in advance.

That means:

• A written rebalancing policy decided before the next selloff
• A cash sleeve sized to actual spending needs rather than to headlines
• A portfolio built around risk capacity, time horizon, and goals
• An advisor to help you stay aligned with your plan during periods of market stress

An advisor can help support discipline, but cannot eliminate market risk, prevent losses, or assure better performance.

Because stressful periods will come. The plan exists so your next decision does not have to be made in the middle of one.

Methodology Note on the Stress-Test Example

The stress-test example assumes $100,000 invested at the October 9, 2007 S&P 500 peak, when the price index closed at 1,565.15. Both lines are computed on a total-return basis with dividends reinvested using the S&P 500 Total Return Index.

The stayed-invested line tracks the index through May 2026. The panic-selling line sells at the March 9, 2009 close, when the price index closed at 676.53, holds cash through March 28, 2013, when the price index broke its 2007 high at approximately 1,569, and then tracks the S&P 500 Total Return Index from that point through May 2026.

The cash-period return is assumed to be 0% for simplicity. Actual money-market returns during much of the 2009–2013 period were low but positive, so including them would modestly improve the panic-selling outcome without changing the overall conclusion. You cannot invest directly in an index.

Sources: Morningstar Mind the Gap annual studies; Investment Company Institute fund-flow data; S&P Dow Jones Indices; historical S&P 500 closing data; contemporaneous market reports.

This post is for informational purposes only and does not constitute investment advice. The Investor A / Investor B comparison is a hypothetical illustration reflecting one specific market cycle and one specific timing decision; different assumptions would produce materially different results. Past performance does not guarantee future results. For SCM Investment Services’ full firm disclosures, please see our disclaimer page.