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When it feels like the world is ending, the allure of cash can be difficult to resist. While it earns next to nothing, cash is safe and liquid, and most importantly, it won’t go to zero.

This was the trade-off many investors made earlier this year, when financial markets were convulsing with panic over the global pandemic and the economic lockdown needed to fight the coronavirus.

Between February and April, the total balance in North American money market funds rose by nearly half, as roughly US$1.3-trillion flowed into funds investing in cash and cash alternatives, according to U.S. Federal Reserve data. Trillions more piled up in U.S. and Canadian commercial bank accounts.

As stock indexes have since ascended toward their prepandemic levels, overall cash weightings have remained relatively high, leaving many investors with a dilemma – how and when to get that money back into the market.

“This happened in 2008 as well,” said Kurt Rosentreter, a financial adviser at Manulife Securities. “They missed their once-in-a-decade opportunity to buy low, and now they don’t know what to do.”

It’s a classic investing mistake, which seems to snag well-intentioned investors with every major market shock. Stocks plunge, sparking a flight to financial safe havens, cash included, whether to preserve capital or to buy on weakness at just the right time.

It probably didn’t help matters that the investing masses were pretty aggressively positioned prior to the sell-off that began in February.

Last year was a great time to be a stock investor, as the S&P/TSX Composite Index rose by 19 per cent and the S&P 500 Index gained 29 per cent. A run like that serves as a powerful draw for retail investors looking to get in on the action, and taking on a lot of risk in the process.

By January, the average U.S. retail investor had built up a heavy stock position, while the average cash weighting declined to just 13.8 per cent, well short of the long-term average of 23 per cent, according to the asset allocation survey by the American Association of Individual Investors.

As a result, individual investors were especially vulnerable to the market slide of frightening proportions that soon took hold, which lopped 37 per cent off the value of the S&P/TSX Composite, and 34 per cent off the S&P 500.

“When people saw it all evaporating, it was a trigger point,” Mr. Rosentreter said. “They pushed it into cash, and I bet a lot of them are still sitting on it.”

The cash position in the average U.S. retail portfolio leapt to 26.1 per cent – the highest since November, 2009. Canadian investors plowed $4.1-billion into money market mutual funds in March alone, while long-term stock and bond funds lost $18.2-billion in assets, according to the Investment Funds Institute of Canada.

A recent study by Vanguard looked at how “cash panickers” have fared – this is the small segment of U.S. investors who moved to an all-cash portfolio between late February and the end of May.

Even if they managed to sidestep the market crash, the vast majority of them would have been better off doing nothing – roughly 80 per cent realized lower returns than their prepandemic portfolios would have.

“Trading in response to market volatility requires an investor to get two timing decisions correct: when to exit equity markets, and when to re-enter them,” the Vanguard authors wrote.

Even investors who maintained some stock market exposure but built up excess cash reserves strategically may now also face the challenge of picking an entry point in a hot market.

The stock market comeback materialized with such blazing speed that some investors simply missed their chance and got trapped in cash, said Lorne Steinberg, president of Montreal-based Lorne Steinberg Wealth Management.

“You’re now sitting with a bunch of cash you wish you had invested, and if you’re waiting for that perfect moment, it may never come,” Mr. Steinberg said.

Better now to methodically deploy a cash hoard with fixed installments over a period of several months, he added. “At least that takes away the paralysis.”

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