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Fear and financial pessimism has turned investors into cash hoarders. According to studies in both the US and the UK people, across all economic levels, are holding onto cash rather than investing in riskier assets.
Forbes magazine recently estimated that the amount of cash in the hands of households, banks and corporations was some $14 trillion. Whilst the latest USB Investor Watch report found that over the last three years investors, on average, are holding 20 per cent of their assets in cash.
“Holding a significant amount of cash is a critical component of investor confidence, as investors believe these are assets they won’t lose.” The USB Investor Watch report said.
In correlation to US Investors UK investors also find comfort in cash. A Europe wide survey of investors aged 25-75 by YouGov and Blackrock found similar results as the USB Investor Watch report. According to the study 77 per cent of UK respondents leave money sitting in cash and 36 per cent have increased their cash savings over the last 12 months.
Accessing cash and being able to draw on funds in emergencies, to pay bills and expenses was one of the main motivators in keeping cash cushions. Over 90 per cent of US investors surveyed for the USB Investor Watch report said it was important to them to have enough cash holdings to cover emergencies.
It is not just investors with limited funds or reduced assets that are keeping a pool of ‘rainy day money’. Top earners are keeping their piggy banks full too.
It is not just investors with limited funds or reduced assets that are keeping a pool of ‘rainy day money’. Top earners are keeping their piggy banks full too. Recently, Spectrem Group asked wealthy and affluent investors “what do you wish you had done differently in the crisis.” For the top earners—those making $750,000 or more—the No. 1 answer was “saved more.”
Hoarding cash may not be the answer
However according to independent, global investment manager, Blackrock, cash hoarding may not be the most lucrative way of investing. In Blackrock’s Investor Horizons Survey the company warned that returns on cash investments can be eroded by inflation.
Blackrock estimated that on a hypothetical investment of £10,000 over the space of 25 years the cash return would only be £47,000. Whereas the same investment in equities would yield £92,900 and in bonds the return would be £83,300. Meaning that equities and bonds yield almost double that of cash savings.
“The safety of holding a lot of money in cash for a long time might result in investors not reaching their financial goals.” Blackrock says. “Inflation can erode the real value – what people can buy with their money – on all investments, but historically returns on cash in particular have struggled to keep up with inflation over the long run due to the low interest rate environment.”
Blackrock believe high quality equities which pay regular dividends, corporate bonds or multi-asset solutions are key to creating real returns. “In today’s world of low yield and low interest rates, investors used to safe real returns from cash savings and government debt may need to go further for income,” Blackrock says.
Whilst financial advisers, investment managers and financial commentators may urge investors to take a little risk, investors are not still cautious. The spectre of the last high-risk financial age still lingers making investors reluctant to dip into their cash.
According to former investment banker and economic commentator, Robert Lenzner,“More uncertainty breeds more uncertainty which breeds more hoarding of cash.” Writing in Forbes Magazine Lenzer went on to say: “Maybe the hoarders know something about the future that’s not clear to us observers.”
Maybe they do, what is certain they have no plans to give up their cash assets anytime soon. And if you are in the 90% of risk adverse emergency cash hoarders neither do you.