With S&P 500 And with Treasury bonds falling sharply in March, investors have been shifting to cash for safety. As of the end of February, there was about $8.25 trillion sitting in money market funds, a new all-time high. It’s also a huge increase from the nearly $5 billion parked in these funds as recently as 2022.
The environment looks a little reminiscent of the year 2022. The risk of inflation increases. Interest rates are skyrocketing. Stocks and bonds both go down together. Gold has fallen sharply from its highs since the beginning of this year. Every major asset class is down, so cash seems to be the only viable place to look for safety.
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The problem with all that money moving into money market funds is that they are missing out on stock market returns.
Even if we go back to early 2022, which was just before the bear market and when the amount of money sitting in money market funds increased, the total return of the S&P 500 would have been 42%. Total refund of Vanguard Federal Money Market Fund at that time it was 18%.
Putting and keeping that money in the S&P 500, of course, would require some fortitude. The index is down more than 20% in 2022. It then dropped by about 20% again over the past year. Right now, it’s about 8% off its peak. But despite all the drawdowns, volatility, and ups and downs, an investment in the S&P 500 would have doubled the return.
The conditions driving negative investor sentiment right now are valid. The market has priced out almost any chance of a rate cut this year, typically a bullish catalyst for stocks. The Iran conflict has pushed oil prices to their highest level since 2022. The US economy is slowing, and the labor market is struggling to generate any consistent job growth. Those factors certainly justify the pullback in stock prices.
But the most important thing in the short term is obviously the Iran conflict. As long as it drags on without resolution, investors are less likely to want to bid the stock prices too high.
It is in the long-term view that the bullish argument for buying stocks here makes more sense. Geopolitical conflicts are often temporary in nature. Market volatility tends to increase as these events occur, only to see conditions return to normal once they reach their conclusion.
Granted, it may take weeks or months for the current war with Iran to end. But it can happen anytime. Once it does and that cloud of uncertainty rises, chances are good we’ll see stocks and bonds react. If investors can view the current situation as a bearish buying opportunity and are willing to ride out what happens in the near term, it can be really good for their portfolio returns.
Perhaps the biggest reason why moving to cash is risky is because of the behavior of investors themselves.
What often happens in market corrections is that investors only react after stock prices have fallen. At that time, they move their portfolios to cash, thereby covering the losses that have already occurred. Only when conditions improve, stock prices are likely already rising, and the coast seems clear to move from cash back to stocks.
In this situation, they take losses and miss out on profits, so they hurt their profits compared to if they had done nothing.
Getting in and out of money requires the investor to be doubly honest. First, they have to get out of the stock well while there is some (unknown) downside to come. Second, they must have the discipline to return to the stock at a lower price than when they originally exited. Most investors, even professionals, don’t have the consistent ability to do that. And no one has the ability to see the future.
In short, moving into cash due to short-term market volatility is often a mistake. Periodic market corrections are the price of admission to invest in stocks in the first place. Often, the best thing investors can do is nothing at all.
Before buying a stock in the S&P 500 Index, consider the following:
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David Dierking has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a policy of disclosure.
Why Some Investors Are Moving To Cash In 2026: Is That A Mistake? was first published by The Motley Fool
