Are you sitting in too much cash? Heather Pelant discusses an all-too-common investing phenomenon.
In my financial advisor days, I had a client who was a successful commercial airline pilot, and had every intention of maintaining his comfortable lifestyle in retirement. When he and his wife came to me to discuss their retirement plan, I discovered that his company-sponsored 401(k) was made up entirely of cash. He was unaware that he had not invested his contributions and missed 22 years of compounding returns by staying out of the market. While this example is quite extreme, it begs the question – what is your relationship with cash?
Market Realist – The graph above shows the cash held by U.S. households as a percentage of their financial assets. The weight accorded to cash as a percentage of financial assets had increased after the financial (XLF) crisis of 2008. As the U.S. economy started recovering, the weights given to cash started to decline but they have ticked up again in 2014.
You can attribute this trend to the heightened geopolitical tensions in Ukraine and Russia (RSX) and the recent uptick in volatility (VXX) in U.S. equity markets (IVV). The uptrend in volatility and worries about a U.S. stock market (SPY) bubble have caused concern among investors. The first quarter saw more and more people hoarding cash rather than investing in markets.
Read on to the next part of this series to see how return expectations all over the world have changed and why a cash strategy can’t cope.