In recent weeks, numerous financial media outlets have commented that investors are retaining high amounts of cash in their portfolios. While this may seem unusual when the market continues to flirt with all-time highs, it does not seem surprising because of the ongoing market volatility. At Spectrem, we have more than 20 years of historical data regarding the portfolios of affluent investors, so we decided to see if we could verify this information.
As you may be aware, every month we ask investors how they intend to invest their own assets in the next month. We also ask investors if they were given $100,000 to invest today, how they would invest that $100,000. In January of 2019, 24% of investors indicated they were going to invest their own assets primarily in cash in the next month and 23.8% said they would invest their $100,000 gift in cash. By August of 2019 the percentage that would invest in cash increased. The number that would invest their own assets in cash increased to 28.8% and the percentage that would invest their extra $100,000 in cash increased to 30.4%. So, clearly, compared to earlier in the year, investors believe they should be steering their assets into cash.
Spectrem also tracks the amount of assets individuals actually hold in their deposit accounts. There are differences in whether or not the amount of cash in deposit accounts is increasing based upon net worth. As you can see by the charts below, Mass Affluent investors (those with $100,000-$999,000 of net worth) had about 20% of their assets in deposit accounts at the beginning of 2019. By August, that amount had increased to about 22%. Millionaires (those with $1 million to $5 million of net worth) had just over 14% of their assets in deposit accounts at the beginning of the year, but by August that amount had increased to almost 16%. The Ultra High Net Worth (those with $5 million to $25 million of net worth) had approximately 9% of their assets in deposits at the beginning of the year and after increasing to over 14% in July, fell back to 10% in August.
Therefore, Spectrem’s data does concur with many of the recent news reports. It’s interesting to note that prior to the Great Recession, deposit amounts for all levels of wealth were much lower than today.
The big question is why are investors keeping more assets in cash? First, it is important to understand that since approximately 2009, investors have continued to be more cash-heavy than in the past. Many felt they were caught unexpectedly by the market crash in 2008 and didn’t want to be in that situation again. But, in recent years, investors have once again become increasingly comfortable with investing and have begun to trust their financial advisors more.
Clearly the primary reason investors are once again increasing their levels of cash is because of the market volatility. Spectrem’s ongoing research and monthly index of investor confidence highlights that investors are concerned about what may happen with the stock market in the next 12 months.
And how long will this skepticism and movement towards cash last? It’s fairly safe to predict that it will last at least until the 2020 Presidential election. When asked if they believe the stock market will drop if Donald Trump is not re-elected as President, more than half (51%) of investors said “yes” and an additional 36% agreed but indicated they felt it would recover. When asked if they felt whether or not the stock market is rational, investors scored a 42.29 on a 100-point scale, with 100 meaning completely rational. I guess that means that it is considered more irrational than rational.
As we have seen in the past, investors tend to be skittish in an election year. The fact that this dynamic is already impacting investors more than a year out indicates that it is critical for financial advisors to be reaching out to calm investors over the next 12-14 months.