What could feel more certain than sitting on lots of cash? Most financial advisors agree: after paying down high-interest debt, building up a cash emergency fund (equivalent to 3-6 months’ worth of salary, more if you’re self-employed) should be among your top priorities.
Cash is king for multiple reasons: it increases financial security, opens up choices, is perfectly liquid, and it’s reassuringly concrete. Great as cash is, however, it’s possible to love it too much. Recent data shows Americans are currently heavily-weighted in cash to a remarkable degree – and holding too much cash may have invisible, and surprisingly serious, long-term costs.
How did we get here? Here, once again, the financial crisis played a key role. Unemployment and excess consumer debt taught many Americans to love their cash – and many have beefed up their reserves beyond what is strictly necessary. Other investors’ may be cash-heavy because they liquidated long-term holdings to meet short-term needs, or sold off positions into cash out of nervousness. Much of that cash is still sitting on the sidelines.
How much uninvested cash are we talking about? A ton. Consider the following:
- A 2013 BlackRock survey found nearly half of U.S. investors’ portfolios are sitting in cash. Despite voicing concerns about how they’ll meet their long-term goals, half intended to keep a similar level in cash over the next 12 months – and 36% planned on increasing their cash holdings.
- In a recent Bankrate.com survey, 39% of millennials said cash is their preferred way to invest money they won’t need for at least 10 years.
- According to the same Bankrate survey, overall one in four Americans picked cash as their #1 investment vehicle for long-term goals. (Number two was real estate at 23%, with the stock market a distant third at 19%.)
- We’re seeing this wide-scale trend in our backyard, too: TradeKing clients currently hold $1 billion in uninvested cash. That’s a quarter of all the assets we hold under management and a record high in nearly a decade of operating as a brokerage.
What’s wrong with this picture? Cash typically doesn’t grow meaningfully over time, particularly in this historically low interest-rate environment. Even modest rates of inflation erode cash’s buying power over the years. Cash provides short-term security, but it dooms you to work much, much harder than your money does to meet your long-term financial goals.
Not all investors are cash-heavy out of fear. Many are stumped by the question: what should I invest my cash in? When asked what might prompt them to move out of cash, respondents to the BlackRock survey wished for “guaranteed returns” but also cited realistic concerns: reducing personal debt (29%), getting tax breaks for their investments (21%), and the need for better knowledge and guidance in investing (20%).
If you’ve suffered portfolio losses beyond your comfort zone of risk, that’s useful information – but what’s the best way to act on it constructively? If you incurred heavy losses on just a few positions, you’ve learned the value of diversifying. Other investors cashed out of expensive traditional advisor accounts, seeking guidance that costs less and delivers more value. But where should that money go?
It’s not easy to answer those questions, and the consequences for wrong answers are high. Most investors with too much uninvested cash seek a next step they can feel confident in; that won’t eat up their time with research; that’s convenient and affordable.
We started TradeKing Advisors to give these questions satisfying answers. We know you don’t have endless time (or interest) to devote to this problem, but you do recognize uninvested cash needs a smarter long-term plan. Do your future self a favor and put some of your “mattress-cash” to work with us. It’s easy, smart and streamlined – and inaction may cost way more than you may realize.