Staying Diversified When Turbulence Makes Cash Tempting

A tense global trade war, policy uncertainty and other investor concerns in recent weeks have unleashed the sharpest market swings in years, with the CBOE Volatility Index (VIX) spiking to 52.3 on April 8.

When markets retreat, it’s understandable that investors can be tempted to abandon their long-term strategy for the perceived safety of short-term cash-like investments. But selling when the chips are down has its own risk—missed growth potential from the inevitable rebound across asset classes. In fact, post-correction recoveries have historically presented favorable conditions to add exposure across asset classes, according to our research.

Starting with the 2000 dot-com bust, a diversified strategy of global equities, high-yield corporate bonds and government/sovereign bonds outperformed short-term US Treasury bills after four of the biggest market downturns (Display). The contrast has been especially sharp during one-year recovery periods. For instance, the strategy returned 53.5% versus 0.1% for cash for the 12 months starting from the March 2009 market low. Most recently, its 13.7% return outpaced 4.7% for cash for the year following the 2022 sell-off—when yields on money market and cash-like accounts were historically high.

Today’s turmoil can be jarring, but markets have historically rebounded from major downturns. We believe it’s better to remain well diversified and stay put.

Moving forward, we expect reasonable economic growth, falling inflation and normalizing monetary policy to support risk assets such as equities, credit and government bonds—all key pillars of a multi-asset strategy.