Worried about a stock market crash? Here’s where to park your cash

#1. Cash offers liquidity and safety during equity market downturns

During a stock market correction, many investments lose value rapidly, and liquidity becomes crucial. Cash in a high-interest savings account remains safe from market volatility. Unlike stocks, which can see sudden drops in price, your cash balance is secure and unaffected by market swings. This ensures you have readily accessible funds to cover expenses or invest when better opportunities arise.

#2. Cash in high-interest accounts earns interest while staying liquid

In a typical savings account, the interest rates are low, and inflation may erode the purchasing power of your cash. However, a high-interest savings account offers a better yield, allowing you to earn more on your cash reserves. While the interest may not outpace inflation entirely, it provides some return on your money, helping it grow modestly while staying liquid and accessible.

#3. Having cash offers opportunistic buying opportunities (buy low and sell high!)

Holding cash during a market correction puts you in a strong position to take advantage of investment opportunities. When stock prices fall during a correction, many high-quality assets may become undervalued. Having cash on hand allows you to buy stocks, bonds or ETFs at lower prices, capitalizing on the potential for future growth once the market recovers.

#4. Minimized risk

When stock markets correct, there is often widespread uncertainty. Holding cash in a high-interest savings account minimizes your risk exposure. Unlike investing in the market, where losses can be substantial, cash in a savings account is typically insured (in Canada, this would be through the CDIC, up to a certain limit), reducing the risk of losing your principal.

#5. Preserving capital

One of the main objectives during a market correction is to preserve your capital. By keeping a portion of your portfolio in cash, you are preserving that capital and ensuring it doesn’t suffer from the same market losses as your equity investments might. High-interest savings accounts, while not offering high returns, can serve as a stable part of a diversified portfolio, providing balance in turbulent times.

Two ways to keep cash

While there are various ways to keep cash, two of the most common and easiest-to-implement options are to stash your cash in a money market fund or to open a high-interest savings account.

Keeping cash in a money market fund

A money market fund is a type of mutual fund that invests in short-term, highly liquid and low-risk debt instruments. These funds aim to provide investors with a safe place to park cash while earning a modest return, typically higher than a standard savings account.

Most of the big banks offer a money market fund, meaning you can buy and sell shares in these funds through any trading platform.

If you plan to park your money for an undetermined amount of time, you may want to consider funds with better historical performance. Good options include:

• Purpose High-Interest Savings ETF (TSX:PSA): With a yield of 5.05%, it’s one of the highest-yielding funds currently available. It invests in high-interest savings accounts at major Canadian banks, offering a low-risk option with monthly distributions.
• Horizons Cash Maximizer ETF (TSX:HSAV): This ETF boasts a yield of 5.30%, which is among the best returns for a money market ETF. It reinvests all income, increasing the fund’s net asset value (NAV) daily, and offers a very low MER of 0.12%, making it an attractive option for tax-sheltered accounts.
• CI High Interest Savings ETF (TSX:CSAV): Offering a yield of 4.90%, this ETF is also a popular choice for those seeking a low-risk investment in Canadian dollar-denominated high-interest savings accounts
• BMO Money Market Fund ETF Series (TSX:ZMMK): This fund offers a yield of 4.98% and primarily invests in short-term government and corporate debt, providing stable returns with low-risk.

To get started, you’ll need to open a discount brokerage account. Good options include:

• CIBC Investor’s Edge
• Wealthsimple
• Questrade

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Keeping cash in a high-interest savings account (HISA)

During a stock market correction, many investments lose value rapidly, and liquidity becomes crucial. By keeping your cash in a secure bank account that earns a higher interest rate, you not only protect your money, but you remove the volatility to your portfolio. Plus, cash in a HISA ensures you have readily accessible funds to cover expenses or invest when better opportunities arise.

Read More: Pick the best high-interest savings account

Bottom line

Whether you open a high-interest savings account or invest in a money market fund, both options offer strong returns compared to traditional savings accounts plus, investors get the benefit of accounts that keep cash highly liquid, which is excellent for conservative investors looking to park cash during volatile market conditions.

Sources

1. Covenant Wealth Advisors: Understanding Stock Market Corrections and Crashes (2024) (Sept 26, 2024)