Investors pulled a record amount of money from stock and bond funds late in 2018 and tucked it into safe havens such as CDs, money market funds or U.S. Treasuries that mature in a year or less.
In better times, investors usually use bonds as a buffer when stocks turn nasty, but last year stock and bond funds alike were losers. “The flight to safety was perplexing because this was not a 2008 market meltdown, but I don’t think people are willing to wait anymore to see,” said Tom Roseen, Lipper head of research.
Among the concerns gnawing at investors: uncertainty about interest rate increases, the U.S. trade dispute with China and slowing global growth.
“This is the first time in years, that I have been looking at cash as a viable asset class,” said Linda Erickson, a Greensboro, N.C. certified financial planner.
With some money-market funds and savings accounts yielding more than 2 percent, parking cash was far more acceptable in 2018 over previous years where interest rates were closer to zero for the same accounts.
When shopping for high-yield bank accounts beware of rules such as minimum deposits or balance requirements and make sure your money is FDIC insured.
Certificates of deposit may pay up to 2.7 percent now if you are willing to tie up your money for a year, but in the current environment, there is little need to commit money for long periods or to use brokers for safe investments. People can buy 13-week Treasury bills paying about 2.4 percent through the federal government’s Treasury Direct program.
While holding some cash is wise amid so much uncertainty, Rick Rieder, BlackRock chief investment officer of fixed income, noted that if rates are not rising and the stock market falls, 10-year Treasury notes could instead play their usual role in providing a buffer from stock losses.
If history is any indication, investors worried about bad times recover faster if they stay the course in a typical diversified portfolio. Nevertheless, people often find it more comfortable to increase their cash during uncertain times. Even when the markets are not going through major gyrations, research shows cash has a powerful soothing effect on people.
Sonja Lyubomirsky of the University of California Riverside and Joe Gladstone of University College London surveyed British bank customers in 2016 and found that being able to see cash sitting in accounts and easily accessible gave people a feeling of comfort.
Gail MarksJarvis writes for Reuters.