A Primer on Flight to Quality

"Flight to quality" has nothing to do with a nice vacation spot. (If that's what you're looking for, check out The Good Life on TheStreet.com.) It is a term, however, that's often thrown around in the investment world. And even though many investors may have heard of a "flight to quality" in passing, how many actually know what a flight to quality is and what effect it can have on their investments? Do you?

What Is Flight to Quality?

Simply put, a flight to quality is when investors unload riskier investments in favor of more "stable" ones. Typically, this occurs when investors are concerned about the future economic situation and want to put their money somewhere less volatile . Economic uncertainty is usually the primary reason for a flight to quality.

On average, a flight to quality is a widespread move, though it can be applied to single investors as well. An investor involved in highly risky investments like penny stocks would be making a flight to quality if he or she decided to sell the penny stocks in favor of municipal bonds . The municipal bonds are "better quality" because they're less prone to market price movement, so are considered more stable.

How Does a Flight to Quality Occur?

As in the example, a flight to quality doesn't have to stick to one asset class (although it can). A flight to quality could be from a small-cap stock like Crocs (CROX) to a "blue chip" name like Apple (AAPL), from a stock to a money market account , or from a junk bond to a government bond . As long as the investor is moving money from a type of investment with more risk to one with less risk (see "Allocate Your Assets Like a Pro"), you're looking at a flight to quality on some scale.