26 September 2020

Retirement Savers Flocking To Cash

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According to data from the Center for Applied Research at State Street Corp., a large asset manager and custodian, investors around the world, at all asset levels, are stockpiling cash. This is despite the five-year growth pattern of the market. Over the last five years, investors have increased their cash allocations from 31% to 40% of their portfolios.

Cash holdings vary widely around the globe. The highest is in Japan, at 57%, and the lowest in India, at 26%. Investors in the U.S. fall in the middle, with an average cash position of 36%, which is up from 26% in 2012. The State Street poll was conducted its in the first quarter of 2014 and defines cash as money in savings and checking accounts and cash equivalents, such as money market funds.

One of the reasons for the recent stockpiling of cash is that many investors are haunted by the 2008 crash and is consistent among different age groups. While the baby boomers (ages 49-67) have 41% of their money in cash, Generation X (ages 33-48) and the Millennials (under 33) each hold nearly 40% in cash, as well, despite the fact that they have years to go before retirement.

To be sure, the cash figure includes emergency reserves, which ideally should be held in cash or cash equivalents. Still, the allocations are higher than what experts think is ideal for many households. As a general rule of thumb, investors should subtract their age from 100 to determine the amount to hold in equities, which deliver a higher average return over the long run.

State Street also conducted a financial literacy test and overall, investors globally performed badly. The financial literacy quiz posed 13 questions on topics including fees, returns, and active versus passive management.

Respondents in Singapore scored the highest, with a grade of 70%. Americans, who ranked tenth out of the 16 countries polled, earned a grade of 60%.  Respondents in Japan, Germany, the United Arab Emirates, India, Netherlands and France scored even worse than the U.S.

The findings of the financial literacy test show that nearly half of investors don’t know the annual return of their investments and 64% are in the dark about the fees they pay. Only 15% are aware that passively managed investments—such as index funds—are cheaper than actively managed funds. And more than one-third believe that bonds “help minimize the impact of inflation, when in fact bond returns are highly vulnerable to inflation increases,” State Street says.

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