The Risks Of Fleeing To Cash In Times Of Crisis

As markets unraveled this past March, there were few places for investors to hide. As the coronavirus spread at an alarming rate across the globe, equity markets sold off indiscriminately, causing many panicked investors to sell riskier assets in exchange for cash. Unsurprisingly, the U.S. dollar was one of the few assets to strengthen during this time, due to its perceived status as a safe haven in times of crisis.

Flight to cash

All told, investors pulled $71 billion from U.S. equities, as illustrated in the chart below. But was it a wise move? The data suggests otherwise. Consider this: As of June 30, 2020, investors who sold their equity holdings at the market bottom in late March would have missed out on a 39.3% rebound, as measured by the S&P 500.

Parting ways with equity investments at or near a market bottom isn’t a new trend.Many investors have approached equities with caution since the Global Financial Crisis (GFC) in 2008-09.

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Equity net flows

Source: Morningstar Direct. Cumulative Flows: Bond Flows: Morningstar Broad Category, Bonds: Taxable Bonds, U.S. Equities, Cash: Money Market – Taxable.

Where did that money go? 

Looking at the numbers below, one could make a guess that safe-haven assets like cash and bonds were the primary beneficiaries when investors decided to exit the market. From the beginning of January 2009 to the end of June 2020, U.S. equities experienced $123 billion of net outflows, while $2.3 trillion and $1.7 trillion piled into bonds and cash, respectively.

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Cumulative flows by asset class

Are investors better off invested in cash?

From January 2009 through June 2020, equities returned 337% (while average net flows were negative $2.6 billion). Cash and bonds, meanwhile, returned 5% and 64% during the same time period.

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Cumulative returns by asset class

During times of crisis, many investors who’ve worked their whole lives saving for retirement start thinking about what happened during past recessions, such as the GFC.Memories of these prior events, coupled with the barrage of frightening headlines from media outlets, can make it tough to maintain a planned asset mix and stay invested amid a market correction. But are investors well-served by abandoning their long-term allocations to move to the safety—but limited return potential—of cash? It’s true that with the turmoil of the COVID-19 sell-off still in its infant stages, the future is yet to be fully seen. However, it’s fair to say that moving to cash at this year’s market bottom and forgoing a 39.3% return from equities is likely to have been a costly mistake for many investors.

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Performance quoted represents past performance and does not guarantee future results.

Diversification does not assure a profit and does not protect against loss in declining ...

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