Investors Flee Stocks for Cash Amid Tariff Volatility, Risking Long-Term Returns

In times of stock market volatility, investors often seek refuge in cash, viewing it as a safe haven. However, experts warn that while cash may seem secure, it also comes with its own set of risks, particularly for long-term savers. Over time, cash yields typically lag behind stock returns, and when adjusted for inflation, the real return on cash is often negative.

During recent market turbulence, investors have been tempted to convert their funds into cash. Financial advisors caution that while cash may feel safer than stocks, it poses risks for long-term savers. Cash, such as funds held in high-yield savings accounts or money market funds, has lower volatility in the short term compared to stocks. However, historically, cash has underperformed stocks over the long term. Holding excess cash instead of investing it increases the risk of not achieving investment goals.

Investors have been fleeing the stock market in response to tariff-related market fluctuations, turning to assets they perceive as safe havens. The U.S. stock market benchmark index experienced significant volatility following statements from the Trump administration regarding tariffs and retaliatory measures from major trading partners, including China. Earlier this month, the S&P 500 index saw its worst two-day performance since the early days of the COVID-19 pandemic, with a decline of approximately 11% following the White House's announcement of tariffs on specific countries.

Cash does offer certain advantages. For instance, during market volatility, cash is readily available for emergencies or significant purchases. However, experts note that cash has historically provided negative real returns when adjusted for inflation. This means that consumers holding 100% of their investments in cash may lose purchasing power over time if cash yields do not keep pace with inflation. Stocks, on the other hand, have the potential for high growth, especially over the long term, but they also come with risks.

Financial advisors recommend that investors maintain a balanced portfolio, allocating funds between safe assets and riskier investments based on their financial and psychological risk tolerance. Those still in the accumulation phase of saving, such as working individuals setting aside part of their income, should hold enough cash in an easily accessible fund to cover emergencies and major purchases within the next five years. The remaining funds should be allocated to stocks and bonds based on the investment horizon and risk tolerance.

Retirees or those nearing retirement should hold sufficient cash, short-term bonds, and certificates of deposit to meet five years of income needs and any imminent major purchases. The rest of their portfolio should be diversified across fixed-income assets and stocks. Even retirees generally need to allocate part of their portfolio to stocks to ensure their investments grow enough to sustain their lifestyle over a potentially long retirement period. All investors should develop a clear investment strategy outlining their allocation to stocks, bonds, and cash, and stick to this strategy regardless of market conditions.