Top money managers warned of stagflation. Then they kept investing. Should you?

For instance, the benchmark S&P 500 Index is up 19.3% over the past three months, while 1,308 new exchange-traded funds have been launched so far in 2025, surpassing the 878 new ETFs listed in the first half of 2024, according to the financial data analysis firm ETFGI.

In the 90 days following the BofA stagflation warning, many of those same portfolio managers hold about 6% of their portfolios in cash, down from 26% in May, which could leave those portfolios vulnerable if a stagflation event occurs within the next year or so.

FOMO rules the market

Even as portfolio professionals ring an economic alarm bell, the idea of pulling out of stocks right now isn’t a popular position, market mavens say.

“When people hear 'stagflation,' most just think of inflation mixed with a slow economy, which is true,” said Julian Merrick, founder and CEO at Supertrader, an artificial intelligence-powered market trading platform. “But for investors, it means slower growth in stock prices, higher costs of living, and less buying power for their money.”

The fact that professional money managers remain buyers in the stock market after warning of a souring economy isn’t surprising.

“Most top portfolio managers manage large funds that need to stay invested,” Merrick said. “Sitting on too much cash hurts their returns over time. They can also move in and out faster than regular investors.”

Other market gurus agree, noting that the overriding reality of fund management is primarily about churning large stock market returns.

“The reality is, money managers are paid to invest, not to sit on cash,” said Dr. Stephan Shipe, an economist, finance professor at Wake Forest University, and founder of Scholar Financial Advising in Winston-Salem, North Carolina. “So, of course, they’ll remain largely in the market, even if they see trouble coming.”

FOMO (fear of missing out) is also a driver of market entry, both for money managers and the average investor.

“Money managers cannot miss a big leg up in the market and underperform their benchmarks, or else they lose their clients,” said Paul Feinstein, CEO and founder, Audent Global Asset Management in Los Angeles. “An investor at home sees NVDA go from $200 to $1700 in just a few years and thinks, [I] might as well jump in late than never at all."

That kind of let it roll sentiment often drives poor decision-making.

“The ability to be aware of [the] impact it has on your investing psyche is the difference maker between average investors and skilled ones,” Feinstein said. He advises staying focused on the actual value of a stock, its core fundamentals, its ability to generate stable cash flows for investors, or its potential to disrupt an entirely new industry. “At that point, you can ignore what the talking heads are saying and make investments with conviction that get you off the rollercoaster of buying high and selling low,” he added.

Additionally, a premier money manager doesn’t make their portfolio decisions like an average investor does, and investors should know that. “Personal cash allocations need to be based on personal risk tolerance, liquidity needs, and time horizon, not on what institutions are doing with someone else’s money,” Shipe said. “Frankly, if your manager is holding 30% in cash, I’d ask why you’re paying them.”

Tread cautiously, and keep a sharp eye on the economy

You can’t blame regular investors who fear a weakening economy but stick to their equity-heavy portfolio plan, especially in partnership with a trusted financial advisor.

“It’s tough,” said Robert R. Johnson, professor of finance, Heider College of Business, at Creighton University. “In the long run, the lower the cash position, the better the performance of investors. In the short run, markets can be quite volatile, and people trying to time markets can certainly win, but can easily lose.”

That’s why time spent in the stock market is more important than timing the market, Johnson said.

“You simply can't time the market and holding large amounts of cash, such as Treasury Bills, is a drag on investment returns,” he noted. According to Ibbotson Associates, from 1926 to 2024, large S&P 500 stocks have returned 10.4% compounded annually, and T-bills have returned 3.3% annually. “Unless you are a superb market timer, it’s hard to overcome that return difference consistently,” Johnson added.

It's also helpful to take the long view and think like a money manager when assessing any dire economic straits.

“Most money managers understand that investing, for the long term, has always won out over trying to time market entries and exits,” Feinstein said. "By that logic, it makes sense for average investors to be fully invested today. Even if 2025-2027 is a painful period for investors, they will almost certainly find their investments quite profitable by 2040,” Feinstein said.

Fund managers have also learned a valuable lesson that regular investors may want to emulate when economic clouds are gathering.

“How much was in cash in 2008?” Feinstein noted. “According to Morningstar, the answer is 63%. When you could buy the S&P 500 at 700, money managers went to cash. That tells us they were fully invested and had taken on too much risk. In doing so, they likely missed out on huge gains from 2008-2011.”

Feinstein said his firm doesn't push clients into cash today simply because stocks are relatively expensive by many classic fundamental metrics. 

“We take profits on stock and invest in other asset classes where we see upside and opportunity, such as private debt, venture investments, and real estate in strong markets,” he added. “If there is an economic crisis ahead, investors should invest in assets that will weather the storm better than the stock market and use the opportunity to grab strong stocks at huge discounts when money managers are racing into cash.”

How to take shelter if stagflation hits

If you believe a stagflation event will materialize, it’s okay to talk to a financial advisor about defensive-minded assets like cash, Treasury-Inflated Protection Securities (TIPs), and government and corporate bonds, which are all typically safer than stocks.

“For regular investors, this doesn’t mean mimicking institutional strategy,” said Alex Tsepaev, chief strategy officer at Dubai-based B2PRIME Group. “Many investors may benefit from diversification, risk exposure reassessment, and focusing on balance rather than chasing returns or exiting. A conversation with an advisor about portfolio resilience, not just growth, is more important in crisis moments.”

In his portfolio, Tsepaev turns to short-duration Treasuries or TIPS when expecting economic upheavals. “They’ve historically helped stabilize portfolios during high-volatility periods,” he noted. “If stagflation is indeed on the horizon, staying calm, flexible, and prepared may be the best position of all.”

Also, know that Treasuries or cash aren’t your only safe haven options. Audent, for example, likes debt and real estate.

“Thanks to banks being very upside down on their commercial lending, the number of dollars flowing into multifamily and student housing has crumbled since 2022 as rates ran higher,” Feinstein said. “That leaves a gap in the market, one in which developers still want to build but, unfortunately, have to pay more for the dollars they need.”

This means Audent can lend at higher rates even in a defensive market environment. 

“We source only the best developers in the choicest markets and lend to their strong companies at 15-20%, or sometimes higher,” he said. “We’re confident debt like this can weather a market downturn because of the due diligence done on the quality of the borrowers in a way that a REIT ETF simply won't be able to match.”