What it is
Flight to quality is an event where many investors move their money out of relatively high-risk investments and into assets that they think are safer or more stable.
It’s also called “flight to safety” and it typically happens when there’s uncertainty in the markets or when an unexpected event hits the economy. A common example is when investors move their money to bonds when the stock market is down.
During these times, people typically focus on cutting or preventing losses. They would rather protect their money or settle for modest earnings rather than take big risks.
What it means for you
When a large group of investors acts the same way, it can heavily impact supply and demand. This herd-like activity may lead to huge price changes, which will affect you if you’re invested in the involved assets.
For example, if you’ve invested heavily in stocks at a time when others are leaving for bonds, then the value of your investments may fall. The opposite could happen if most of your money is in bonds.
You may be tempted to follow suit when a lot of investors are rushing from one asset type to another. Before making any big moves, you may want to take some time to assess the situation carefully.
Certain types of news can trigger a big reaction, but they may be mere rumors or have a short-term effect only. Another way to protect yourself from uncertainty while investing is to spread risk around by diversifying your portfolio.
