The below chart notes money market cash as a percentage of all mutual fund assets is at elevated levels. The data is through June and I have no doubt cash levels are at even higher levels today.
(click chart for larger image)
- This flight to safer investments recalls similar investor behavior in 2001-02, when a bear market coincided with sharp increases in flows to money market funds.
- For example, in October 2002, money fund assets stood near an all-time peak of nearly 35% of all mutual fund assets (reached in January 2003). This cash surge coincided with the low in the S&P 500 and a spike in “bear” headlines.
- Although a new bull market began in October ‘02, investors kept an above average level of cash until February ‘04—meaning in the aggregate, investors overallocated to cash during a 15-month period when stocks rose more than 30%.
- As a result, some investors who kept long-term capital tied up in cash likely missed out on considerable gains.
According to Fidelity, the bottom line is to stay invested if your cash levels are at acceptable levels:
- Historically, investors have increased cash positions during bear markets but have been slow to reallocate to stocks. Sudden corrections—and sudden rallies—have been a normal part of the stock market over time, and attempting to move in and out of it can be a costly endeavor.