Investors Hold Too Much CashWednesday, March 25th, 2015
By: Rob Williams, CFP®, MSF | Chief Investment Officer
High cash balances are one reason why so many Americans feel left behind while the stock market roars ahead. They also represent a threat to the long-term security of many investors. A recent study by the investment management corporation BlackRock estimated that Americans, on average, held 63% of their savings and investments in checking accounts, savings accounts, CDs, and money market funds. Affluent Americans (those with more than $250,000 of investible assets) held slightly less (42%), but still a very high amount, in our opinion. Another study by Bankrate.com showed that 25% of Americans keep all of their long-term savings in cash.
These cash balances are higher than what we see for most prospective clients who walk through our doors. One reason why is that the average BWFA client takes advantage of their employer-sponsored retirement plan. Only 59% of Americans participate in such plans. Furthermore, our clients tend to be more attentive to their finances than the average person.
BWFA’s financial planning and investment advisors try to make sure that our clients have an appropriate amount of cash in safe, easily accessible savings accounts for short-term saving and potential emergencies. If we see clients holding cash balances in excess of their short-term needs, we encourage them to invest for the long term in securities that we expect to earn substantially more over time, even though these securities might be more unpredictable in the short term. But even for those who do invest, there is still a propensity to hold a pile of cash. The average American believes he should allocate 29% of his investments to cash, while affluent investors say that they allocate 26%. Somehow, investors need to develop a plan for their investments and make their money work for them.
Given the low interest rates on cash and cash equivalents, our increasingly long life expectancies, and the difficulty experienced by even affluent Americans in saving enough for their long-term needs, holding high cash balances will make it nearly impossible for many Americans to ever have enough for retirement. Even diligent savers need diversified portfolios with a significant percentage in stocks in order to meet their retirement needs. The reality is that investors are forced into this risky place called the stock market because it is the only alternative that provides a chance of growing their investments enough to retire.
Of course, there are reasons why Americans keep so much in cash. First, high cash balances make them feel safe. Clearly, our recent economic history has made many concerned about the strength of our economy and our financial markets, even though the stock market has continued to advance despite investors’ concerns, and is leaving behind hoarders of cash. Second, people say they want to be conservative with their money; however, being conservative is different than being afraid to participate at all. Finally, Americans say they want to keep their options open, but this reasoning eventually leads to no resolution at all, leaving their investments to fall behind. Somehow, investors need to develop a plan for their investments and make their money work for them.
Granted, investments involve risk, and it is easy to make costly mistakes; however, doing nothing is merely a more certain path to failure. Even with risk, it is possible to invest effectively, given the right strategies. The BlackRock study identified some abits of “highly effective investors,” which include:
• They regularly review their finances.
• They spend time getting informed.
• They seek financial advice.
• They prioritize savings for retirement.
• They maintain diversified portfolios.
Clients of BWFA have already addressed most of these highly effective strategies, and as a result they are accomplishing their financial goals. For those of you who would like help making your cash work for you, we have a team of financial and investment advisors who are eager to help you develop your plan.