Uncertainty and fear are driving affluent investors into cash at record levels, according to the MFS Investing Sentiment Survey. While investors of all ages are moving into cash, they are being led by Generation Y.
Nearly 60% of investors said fear of volatility or needing money is why they are holding high or increasing levels of cash. They also cite liquidity, the ability to have immediate access to their money, and said it will take a meaningful change in the economy or their personal circumstances to change their minds and return to the stock market.
“Investors are in cash for a reason and, regardless of time horizon, conventional investing wisdom no longer applies,” said William Finnegan, senior managing director of U.S. retail marketing for MFS. “The Great Recession of 2008 has had a profound—and longer-lasting—impact on investors’ confidence than expected. Investors, especially younger ones, would rather keep cash in the back than chance the stock market.”
The survey found that on average, investors have 26% of their portfolio in cash, with Generation Y having 30% in cash. The typical investor had 12 months’ worth of cash on hand, and 24% said they are building up these coffers even more.
Sixty-two percent now characterize cash as an important part of their investment strategy, and 25% liquidated a portion of their portfolio in 2010 or 2011 because of market concerns. Fifty-two percent of Gen Y liquidated a portion of their portfolio in the past two years—more than any other age group.
Asked about their top concerns over the next year, 78% said rising healthcare costs, 72% a growing federal deficit, 66% pointed to legislative gridlock, and 53% fear a major drop in the stock market.
One-third said cash is a safe alternative in the current market, and half agreed with the statement, “Keeping my savings in cash makes me feel more secure.”
Eighty-two agreed with the statement, “It is very important for me to have instant access to my cash if or when I need it,” and 65% have their cash in backs.
Only 25% have reinvested the portion of their portfolio that they liquidated back into equities. Another 35% said they plan to reinvest the money in the next 12 months. Twenty-four percent said they will not reinvest the money in the next year.
Asked what would compel them to return to stocks, 55% said consistent improvement in economic indicators, 45% said leadership on a clear deficit reduction plan, and 40% said sustained improvement in the global economy.
For Gen Y, 34% said they would need to see an improvement in their personal wealth, and 37% said their personal situation was the key factor.
“With persistently high unemployment, spotty economic data and uncertainty in Washington, no one is going to tell investors they are wrong to have high cash balances,” Finnegan said. “To the contrary, the data confirm that they are confident in their decisions to hold cash and they consider high cash balances to be integral to their investing approach. A majority, 64%, agree that they worry about inflation eating into their nest eggs, but it seems investors are willing to trade long-term inflation risk with the safety, security and low volatility that comes with keeping cash in the bank.”
The survey was conducted in the beginning of June among 974 individuals with $100,000 or more in household investable assets.