Investors Are Holding More Money in Cash Than Ever Before: Is This a Smart Move?
Written by
Gabrielle Olya
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Molly Sullivan
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Many investors seemingly believe that cash is king — at least in the current economy. A new eToro survey of 10,000 retail investors from across the world found that 39% of investors have increased their cash holdings in the last six months. Additionally, young investors, in particular, are keeping more money in cash — 60% of investors ages 18 to 34 increased cash allocation in the last six months versus just 25% of investors ages 55 and older.
Why Investors Are Increasing Cash Holdings
According to Callie Cox, U.S. investment analyst at eToro, there are two main reasons why investors are upping their cash holdings.
“People build up their savings for many reasons, but these days, 80% of them fall into two main buckets: taking advantage of high interest rates (41%) or saving up their emergency fund (39%),” she said. “One story seems opportunistic, the other seems defensive. But when you consider that people feel exceedingly confident in their investments and income, I’d guess that the urge to capture a 5% rate on savings is overwhelming the fear of the future.”
As for why young investors are most likely to be increasing their cash allocations, Cox believes it’s because they are more likely to want to capitalize on the high interest rates that are now available.
“It’s not because they’re worried about the future,” she said. “Younger investors were much more optimistic than older investors when it came to the economy and their finances. I think younger investors are just over-indexing on opportunity here. It is so easy to move money around and access these 5% savings rates, and a relatively risk-free rate doesn’t sound so bad to many people.”
Is Holding More Money in Cash a Savvy Move?
With the high interest rates available, it can be difficult to determine whether you would get a better return by keeping your money in an investment account or a high-yield savings account.
“Nobody has a crystal ball, but in the past, it’s paid to take risks in the market when interest rates are most enticing,” Cox said. “In five out of the eight past economic cycles, stocks have outperformed cash in the year after rates peaked.”
To determine where to keep your money, you need to determine what you need that money for and how soon you will need it.
“If you’re saving up for a short-term expense, it may make sense to lock in these rates while you can,” Cox said. “But if you’re investing for the long run, look for the silver lining in a slowing economy. Lower rates tend to stoke stock market gains, even if they initially overlap with difficult periods for society.”
Cox noted that building an emergency fund should always be the priority above investing your cash.
“Holding cash can be a smart move if you’re holding it for the right reasons,” she said. “Parking short-term cash for emergencies or short-term expenses makes sense.”
However, if you have an emergency fund set, your money is likely better off in the market over the long term.
“Stashing cash to save up for retirement doesn’t [make sense],” Cox said. “The S&P 500 has grown 8% a year on average since 1950. The opportunity costs of choosing cash over stocks can build up over time. Besides, nobody got rich by saving.”
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