Mustard Seed Money

Mustard Seed Money

Generations Are Hoarding Cash. Why That Is A Problem For Investors

THIS POST MAY CONTAIN AFFILIATE LINKS. PLEASE READ MY DISCLOSURE FOR MORE INFO.

 

Something people regularly ask me is how much cash they should hold in their portfolio.  Personally, I don’t usually hold any cash in mine.  I keep my cash in an online savings account, which is 3-6 months worth of expenses.  This account is known as my “Emergency Fund”.

 

Most of the time, people accept my response.  But sometimes, people ask me if they should hold cash for the inevitable dip.  

 

I don’t like trying to time the market.  Probably because I am bad it at.  So for me, there is no point in holding cash.  For those who are unfamiliar with my investing strategy, I employ a lump-sum investing strategy.  I dump all the cash I have as soon as possible.  You can read more about that strategy here.  

 

Then, I inevitably hear about a study that says that the market drops by 10% every 11 months.  So theoretically, shouldn’t one hold some cash to buy on the dip?

 

Let’s dig down into this real quick.

 

Most recently, the stock market saw a 10% correction in early February from the January 2018 high of 2,872.  For those of you who had cash, you may have thought that that was great, as you were able to buy on the debt.  

 

However, if you look at the previous time the market made a 10% correction, it was in February 2016, when the market dropped to 1,810.  

 

Yes, 1,810 points.

 

If you’ve been in cash waiting for that next 10% drop, you have missed out on a 2-year return of 42%, since February of 2016.  

 

This is why I am such a proponent of lump-sum investing.  If you can’t do that, dollar-cost averaging is a great alternative to ensure that you don’t miss out on market gains.

 

Recently, Wells Fargo conducted a study over the four generational groups:  The Silent Generation, Baby Boomers, Gen Xers, and Millennials to compare their stock, fixed income, and cash allocations of over 900,000 households that are Wells Fargo Advisors clients with assets above $10,000.

 

The results were not pretty.  Each generation’s asset allocation did not line up with what Wells Fargo thought would be best for each.

 

Quick side note: take these asset allocations with a grain of salt.  Like I always say, personal finance is personal for a reason. The asset allocation that works best for you could be more or less risky based on other factors.  What I do hope to show is a comparison to what experts think make sense versus what investors are actually doing.

 

Silent Generation (1928–1945)

Interestingly enough, the Silent Generation (Target Fund 2015) held the least amount of cash in their portfolios.  

  • 11.3% in cash (targeted to hold 6.9%)
  • 30.4% in fixed incomes (targeted to hold 44%)
  • 52.1% in equities (targeted to hold 45%)
  • 6.2% in alternatives/others (targeted to hold 3.8%)

 

Baby Boomers (1946–1964)

This generation (Target Fund 2025) held the second least amount of cash in their portfolios.

  • 13.6% in cash (targeted to hold 6.3%)
  • 19.7% in fixed income (targeted to hold 33.6%)
  • 59.9% in equities (targeted to hold 56%)
  • 6.8% in alternatives/others (targeted to hold 3.8%)

 

Gen Xers (1965–1981)

This generation (Target Fund 2035) held the second most amount of cash.

  • 14.1% in cash (targeted to hold 5.2%)
  • 11.1% in bonds (targeted to hold 15.2%)
  • 67.9% in equities (targeted to hold 76.2%)
  • 6.9% in alternatives/others (targeted to hold 3.1%)

 

Millennials (1982–2000)

This generation (Target Fund 2045) unfortunately held the most cash.

  • 14.2% in cash (targeted to hold 5%)
  • 12.6% in fixed income (targeted to hold 6.4%)
  • 67.8% in equities (targeted to hold 85.8%)
  • 5.4% in alternatives/others (targeted to hold 2.8%)

 

So how do these asset allocations add up to general rules of thumb?

 

Short answer:  Not that great.

 

Even if you don’t follow the guidelines provided by Wells Fargo, you may follow the old adage of (100 – your age) = the amount you should have in equities.  This would mean that if you are 40 years old, you should hold 60% in equities and 40% in fixed income.  Investors are holding too much cash, which might affect their retirement over time.

 

Cash is not an investment.  As most of you know, cash loses value as inflation eats away at it overtime.  With online bank accounts yielding 1.5% or less, the average U.S. investor would take 48 years to double their money in cash.

 

While I understand wanting to hold some cash to maximize your returns, the results will show that holding onto cash is a bad proposition.  That actually pushes investors further from retirement instead of closer to it.

 

So readers, do you hold cash?  If so, what is your reasoning for holding it?  Share you thoughts below.

Comments

  1. Yeah that is very much the opposite of what you would want. I think the older generations are trying to make up for lost times by risking it and the Xers and Millennials….well, a good % of both groups are just scared and/or broke. Not good.

    Reply

  2. If Warren Buffett can’t time the market, I sure as heck can’t! I’ve moved to a tiered Emergency Funding. Have 2 months cash sitting in 1.5% High Yield savings account and 2 months in Vanguard Conservative Growth (40/60 stocks to bonds) Lifestrategy fund. I’ve found most emergencies, I can use my credit card to pay and then move the cash to pay that bill. For my recent large emergency event, well I had to wait for my homeowners to cut a check. I can not think of an emergency where I would need immediate, right now, access to a large sum.

    When I get a lump sum, I just invest it.

    Reply

  3. My friend and I were talking about risk and they found it crazy I had 0 bonds in my 401(k) right now.

    I asked them –

    do you think the stock market will grow in 40 years – “yes”

    are you planning on taking out money from your 401(k) in the next 10 or 20 years? – “no”

    do you want to take advantage of the next dip as best as you can? – “yes”

    So why does it matter if you lose 40% of your 401(k) on the next dip if you won’t be withdrawing any, believe the market will go back up, and want to take advantage of the dip? – “I see what you mean”

    I do think as I get older and closer to FIRE that more bonds will come into my portfolio for the dips, and my non retirement accounts will focus a bit on DGI to help counter them as well.

    Reply

    • Wow…that’s an awesome convo that you had with your friend. I totally agree with you thinking and even more…stocks normally recover within a couple of years from the low, historically speaking. So sounds like you are well positioned 🙂

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  5. Wow interesting to see such large cash positions. Debbie nailed it. I used to keep a emergency fund but now relaize i have a bunch of credit at my disposal. If i rack some debt i sell some assets. Keep that money working for me!

    I have some cash currently from my tax return. ill dollar cost average that into the market. Investing a bit every 2 weeks or so.

    Cheers
    Rob @ Passivecanadianincome recently posted…I can Retire Every Winter, This Year I did…My Profile

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  6. Great analysis and recap.

    I think there are many reasons hyatt people hold on to their cash. It could be that they don’t know how to invest, are saving for a down payment, preparing for the next career move and relocation in their lives.

    Hubby and I are expecting our second baby, so we are kinda hoarding cash to prepare for emergencies.
    Ms. Frugal Asian Finance recently posted…What To Do When You Feel Like A LoserMy Profile

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    • I’m right there with you Ms. FAF!!! I’m holding on to a little bit more cash than I wish mainly because we are trying to decide if we should go overseas or buy a new home. So we’re a bit indecisive right now.

      Reply

  9. We are holding a bunch of cash right now, but it is only because we have some major expenses coming up. In fact, I figure I have to get access to another 50k over the next two years. It is for a good cause because we are finishing up our IVF journey and looking to adopt, which is expensive. Other than that I know in my head I should deploy some of that extra cash. I love the ChooseFI podcast where big ERN (Karsten) took on the mythos surrounding the emergency fund, but I just can’t seem to let it go at the moment. Probably because of the upcoming expenses, but I shouldn’t worry about it because my job is super stable.
    Jason recently posted…Our Top Things to Do in IcelandMy Profile

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    • I’m not a big fan of timing the market. If you need it in the short term, I think it’s fine to hold some cash but timing the market for myself personally has been a loser over the years 🙁

      Reply

  12. I’m a millennial and there is a reason I’m hoarding cash. I want to buy a property. Whereas my parents’ first house was only three times their yearly income, I’m looking at five or six times.

    Also, I’ve had some ethical considerations recently. Through my index funds I’m invested in pipelines and evil companies that I would never shop at. Why park my money there? And the SRIs seem to be slapping a new name on the same old corporations. I’m hoping the financial community could address this or my future investments will be all real estate.
    Lady Dividend recently posted…Your Money or Mental Health?My Profile

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    • Thanks for sharing Lady Dividend!!! That makes a ton of sense with saving up for a home. In addition, I know that Vanguard has some social index funds that exclude companies based on individuals personal and social beliefs. Those might be right up your alley 🙂

      Reply

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