Cold Cash? How to Redeploy in Hot Markets

Investors have parked record piles of cash on the market’s sidelines amid concerns about high valuations and volatility. But short-term safety comes at a price. By clearly defining long-term goals, investors can put idle cash to work with confidence, despite uncertainty about the path to recovery.

When markets crashed in early 2020, many investors liquidated holdings to cash. Yet during the subsequent rebound, relatively little cash was put back in the market. Net flows to worldwide money-market funds exceeded $978 billion in 2020, the highest in over a decade, outpacing flows to stock and bond funds, according to Morningstar data (Display). Despite some outflows from cash in the second half of the year, total money-market assets increased to a record $6.24 trillion in 2020.

Bar chart showing net flows to global money market funds outpacing flows to global equity and fixed income funds in 2020.

Cash is comforting in uncertain times. It offers a safety cushion against unsettling bouts of volatility, which were common even in last year’s recovery. But cash is returning next to nothing with interest rates at record lows—and negative rates prevailing in many developed markets. So, investors pay a steep opportunity cost for staying out of the market. Meanwhile, the steepening yield curve on US Treasuries in early February 2021 is widely seen as a sign of strengthening economic growth and corporate earnings to come.