Should Long-Term Investors Prioritize Cash Holdings Amid Rising Volatility?

The markets of Q2 2025 have been a rollercoaster of extremes, oscillating between panic-driven volatility and eerie calm. The VIX, a barometer of investor fear, spiked to a staggering 60.13 in early April—levels not seen since the 2008 financial crisis—before plummeting to a near-record low of 12.92 by late May. This volatility raises a critical question for long-term investors: Should you prioritize liquidity by holding cash, or risk missing out on growth by staying invested? The answer lies in balancing the need for safety with the cost of opportunity.

The Case for Cash: Liquidity as an Insurance Policy

Extreme volatility, as seen in April’s 60.13 VIX surge, signals markets’ fragility. Such spikes often precede steep equity declines, as investors flee to safer assets like cash or Treasuries. The inverse correlation between the VIX and equities means that holding cash during volatility allows investors to:
1. Preserve capital during downturns. In April, a 10% cash allocation would have cushioned losses as equities likely retreated.
2. Capture bargains when markets rebound. The VIX’s rapid drop to 12.92 in May—though possibly an outlier—hinted at investor complacency, creating buying opportunities for those with liquidity.
3. Avoid forced selling. In volatile environments, investors without cash reserves may panic-sell at inopportune times.

The Case Against Cash: The Opportunity Cost of Sitting on Sidelines

While cash provides safety, it also carries risks. Holding too much cash means forgoing gains during recoveries. For instance, if the S&P 500 rebounded sharply in May (as implied by the VIX’s decline), investors with 100% cash allocations would miss out on potential upside. Over time, cash’s stagnant returns (often below inflation) can erode purchasing power, especially in a long-term portfolio.

The Strategic Middle Ground: A Dynamic Allocation

The optimal approach isn’t an either/or choice but a strategic blend that adapts to volatility cycles. Consider the following:

1. Risk-Based Cash Reserves:
   Allocate 10-20% of your portfolio to cash, based on your risk tolerance. This acts as a buffer during VIX spikes like April’s while leaving most capital deployed for growth.

2. Ladder Maturities for Liquidity:
   Use short-term Treasury bills or high-yield savings accounts to earn modest returns while maintaining access to funds.

3. Rebalance Opportunistically:
   When the VIX dips below 15 (as it did in late May), use cash reserves to buy equities at discounted prices, then replenish cash as volatility resurges.

4. Focus on Quality Growth:
   Invest in companies with strong balance sheets and recurring revenues—those less susceptible to volatility. Their steady performance can offset cash’s stagnation.

The Bottom Line: Volatility Isn’t Going Away

The Q2 data reveals a pattern: markets oscillate between panic and complacency. The VIX’s 20.87 reading on June 30 suggests neither extreme fear nor euphoria dominates. For long-term investors, this is a buying window—but only if you’ve preserved liquidity to seize it.

Act Now:
- Rebalance to ensure 10-20% cash reserves.
- Deploy cash into undervalued, resilient equities as volatility cools.
- Avoid all-in bets, as Q2’s swings prove markets remain unpredictable.

In an era of volatility whiplash, cash isn’t just a safety net—it’s a strategic tool. Use it wisely, and you’ll thrive in both storm and calm.