What does 'Flight to Quality' mean

Flight to quality is the action of investors moving their capital away from riskier investments to safer ones. Uncertainty in the financial or international markets usually causes this herd-like shift. However, at other times, the move may be an instance of individual or smaller groups of investors cutting back on the more volatile investments for conservative ones.

BREAKING DOWN 'Flight to Quality'

For example, during a bear market, investors will often move their money out of equities and into government securities and money market funds. Another example is investors moving investments from high-risk countries with political unrest like Thailand or many thriving yet still not fully established markets like Uganda and Zambia to more stable markets of other countries, like Germany, Australia, and the United States. One indication of a flight to quality is a dramatic fall of the yield on government securities, which is a result of the increased demand for them.

Many investors will monitor for a decrease bond yields as a metric for more challenging economic conditions, including increasing rates of unemployment, stagnating economic growth or even a recession. As interest rates increase, bond prices also tend to fall.

Flight to Quality and Conservative Investment Alternatives

In addition to moving funds from growth stocks, international markets, and other higher-risk-higher-reward equity investments to government securities, investors may choose to diversify their assets with cash holdings. Cash equivalents are investments that can readily be converted into cash and can include bank accounts, marketable securities, commercial paper, Treasury bills and short-term government bonds with a maturity date of three months or less. These are liquid and not subject to material fluctuations in value. (Investors should not expect the value of any cash equivalents to change significantly before redemption or maturity.)

In addition, when markets take a downturn or appear to be taking a downturn, some investors will move their assets into gold. Critics argue that this is a foolish change and that gold does not have the inherent value that it once did, due to decreased industrial demand. At the same time, proponents point out that gold may be helpful during periods of hyperinflation, as it can hold its purchasing power much better than paper money. While hyperinflation has never occurred in the U.S., some countries like Argentina are familiar with the pattern. From 1989-90, Argentina saw inflation hit a staggering 186% in one month alone. In these cases, gold could have the capacity to protect investors.

RELATED TERMS
  1. Capital Flight

    Capital flight includes an exodus of capital from a nation, usually ...
  2. Flight To Liquidity

    Flight to liquidity signifies a mass movement by investors toward ...
  3. Cash Equivalents

    Cash equivalents are investment securities that are convertible ...
  4. Asset Quality Rating

    An asset quality rating evaluates the various risks, such as ...
  5. Government Paper

    Government Paper are debt securities that are issued or guaranteed ...
  6. Government Bond

    A government bond is a debt security issued by a government to ...
Related Articles
  1. Investing

    Investing Basics: Flight To Quality

    At times of market stress, investors flee from risky assets to investments the safest ones available.
  2. Investing

    What Is Wrong With Gold?

    Despite its historic and symbolic appeal, this metal is simply a commodity. Here we explore its meaning as an investment.
  3. Insights

    An Introduction To Hyperinflation

    Hyperinflation isn't some historical curiosity. It is a very real risk that countries and governments still struggle with today.
  4. Retirement

    Money Market vs. Short-Term Bonds: A Compare and Contrast Case Study

    Discover characteristics of money market and short-term bonds, including how the investments are alike and different, and the benefits and risks each offers.
  5. Investing

    How to Earn Better Returns With Less Risk

    Choosing high quality investments leads to better returns and less risk over the long term.
  6. Investing

    8 Reasons To Own Gold

    This precious metal's rich history stems from its ability to maintain value over the long term.
  7. Investing

    Why is Gold a Counter Cyclical Asset?

    Gold is widely considered a safe haven during market turbulence. History has proven gold performs counter cyclically to the state of the U.S. economy.
RELATED FAQS
  1. Why do U.S. Treasury yields decrease in an emerging market crisis?

    Learn why you will often see the yields on Treasuries fall during a crisis in an emerging or foreign market. Find out about ... Read Answer >>
  2. What's the difference between short-term investments in marketable securities and ...

    Most of the time, when an investor or analyst searches through the financial statements of a publicly traded company, he ... Read Answer >>
  3. What are some historic examples of hyperinflation?

    Learn how skyrocketing prices can result in an economy spiraling into hyperinflation, as happened in Germany, Zimbabwe and ... Read Answer >>
  4. How can bond yield influence the stock market?

    Learn how bond yields influence the stock market. The relationship between bond yields and stocks changes depending on the ... Read Answer >>
Hot Definitions
  1. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  2. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  3. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  4. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  5. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  6. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
Trading Center