Why Some Investors Are Moving to Cash in 2026: Is That a Mistake?

With the S&P 500 and Treasury bonds moving sharply lower in March, investors have been shifting over to cash for safety. As of the end of February, there was approximately $8.25 trillion sitting in money market funds, a new all-time record high. It's also a sharp increase from the roughly $5 trillion parked in these funds as recently as 2022.

The environment is looking a little reminiscent of 2022. Inflation risk is on the rise. Interest rates are moving aggressively higher. Stocks and bonds are both moving lower together. Gold is sharply off of its highs from earlier this year. Every major asset class is moving lower, so cash looks like the only viable spot to look for safety.

The problem with all of that cash moving into money market funds is that it's missing out on stock market returns.

Image source: Getty Images.

Cash has badly underperformed the S&P 500

Even if we go back to the start of 2022, which was just prior to the bear market and when the amount of cash sitting in money market funds was increasing, the total return for the S&P 500 would have been 42%. The total return for the Vanguard Federal Money Market Fund over that same time was 18%.

^SPXTR data by YCharts

Putting and keeping that money in the S&P 500, of course, would have required some resilience. The index fell more than 20% in 2022. Then it fell nearly 20% again about a year ago. Right now, it's about 8% off its high. Yet despite all the drawdowns, volatility, and ups and downs, an investment in the S&P 500 would have more than doubled the return of cash.

How long will current volatility last?

The conditions driving negative investor sentiment right now are valid. The market has priced out virtually any possibility of a rate cut this year, traditionally a bullish catalyst for stocks. The Iran conflict has pushed oil prices to their highest level since 2022. The U.S. economy is slowing down, and the labor market is struggling to generate any consistent job growth. Those factors certainly justify a pullback in stock prices.

But the big catalyst in the short term is clearly the Iran conflict. As long as it drags on without resolution, investors are unlikely to want to bid up stock prices too high.

It's in the longer-term view that the bullish argument for buying stocks here makes more sense. Geopolitical disputes are often short term in nature. Market volatility tends to rise as these events are happening, only to see conditions largely return to normal once they reach a conclusion.

Granted, it may take weeks or months for the current Iran war to come to an end. But it could happen at any time. Once it does and that cloud of uncertainty lifts, odds are good that we'll see stocks and bonds rally in response. If investors can view the current situation as a buy-low opportunity and are willing to ride out what's happening in the near term, it could be a real positive for their portfolio returns.

Investors can be their own worst enemies

Perhaps the biggest reason why moving to cash is dangerous is because of investor behavior itself.

What commonly happens in market corrections is that investors react only after stock prices have declined. At that point, they move their portfolios to cash, thereby locking in the loss that's already occurred. Only when conditions have improved, stock prices have probably already gone back up, and the coast looks clear do they move from cash back into stocks.

In this situation, they've taken the loss and missed out on the gain, therefore damaging their returns compared to if they'd just done nothing.

Moving in and out of cash requires an investor to be right twice. First, they have to correctly move out of stocks while there's further downside ahead (which is an unknown). And second, they must have the discipline to move back into stocks at a lower price than when they originally got out. Most investors, even professionals, don't have the consistent ability to do that. And nobody has the ability to see the future.

In short, moving into cash in reaction to increasingly volatile short-term conditions in the market is usually a mistake. Periodic market corrections are simply the price of admission for investing in stocks in the first place. Often, the best thing investors can do is nothing at all.

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 disclosure policy.