Millionaires have increased their investments in cash and cash-equivalent assets significantly in the last year, the latest CNBC Millionaire Survey reveals. Financial advisories argue that the rise in interest rates makes cash holdings more appealing. Nevertheless, financial advisors suggest that the average investor who doesn't need the money for an emergency fund or a major short-term purchase is likely reducing their long-term success by keeping the money in cash.
Millionaires shifted money from stocks and into cash and cash-equivalents within the past year, and could potentially make further changes to their investments in the upcoming 12 months, according to the CNBC Millionaire Survey. Advisors, however, opined that the average investor should not follow in the footsteps of the millionaires, as it would depend on their individual context and reasons for the changes.
As of spring 2023, a survey found that millionaires had 24% of their portfolio in "cash and cash-like investments", up from 16% in fall 2022 and 14% in spring 2022. This included money market funds, checking and savings accounts, plus certificates of deposit and was conducted on 764 people with $1 million or more of investable assets in April 2023. Additionally, the Capgemini Research Institute survey revealed affluent investors are maintaining an unprecedented amount of cash.
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Investors have not seen much of a return from stashing their money in cash-like accounts since the 2008 financial crisis. However, as the Federal Reserve has began raising its benchmark interest rate, the yield of such accounts has risen to around 5%. Ted Jenkin, a certified financial planner situated in Atlanta, notes that having more funds in cash today is becoming a more viable option.
Jenkin, founder of oXYGen Financial and a member of CNBC's Advisor Council, noted that investors now have a choice. Although this choice may seem beneficial, with inflation currently at an annual rate of around 5%, it might not make much of a difference in the end. Moreover, not all accounts may offer consumers the most favourable rates; for example, high-yield savings accounts held at online banks usually provide better returns on cash deposits as opposed to those held at traditional banks. Finally, affluent investors are keeping more money on the sidelines at the moment, as they wait for other investment avenues such as private equity and real estate to become available, Jenkin commented.
The CNBC millionaire survey indicates that wealthy millennials have shifted into cash more rapidly than older investors, even though they generally have a longer investment time horizon and can bear more financial risk. For instance, 39% of millennials transferred funds from stocks to bonds or money market funds over the last two months, in contrast to 26% and 18% of Generation X and baby-boom investors respectively. Moreover, 30% of millennials plan to do the same over the next year, which is three times the rate of the other generations. Carolyn McClanahan, a CFP based in Jacksonville, Florida, believes that young investors may be driven by fear and anxiety due to the current financial situation, making a hasty decision to move into cash. Nonetheless, Jenkin suggests that the average investor should not wait in cash but invest in higher-return options such as stocks, provided that their money is not needed for at least five years.
Millionaires seem to think a weak stock market is in the cards for 2023, which is risky as trying to predict the future rarely pays off in the end. McClanahan, founder of Life Planning Partners and a member of CNBC's Advisor Council, warns not to be drawn into moving to safety if it is not supportive of one's desired financial outcomes. His advice is that in the long run, stocks have tended to be more profitable than alternatives such as cash or bonds. He further asserts that those in their twenties and thirties would be wiser to keep their 401(k)'s in stocks, as they are not likely to need to draw on them any time soon.
McClanahan suggested that households evaluate the need to up their cash-like holdings depending on the situation. Factors such as anticipated expensive purchases and an emergency fund to cover unexpected expenses in the next five years should be taken into account.
She suggested that cash can be a beneficial option for people who need funding for a home, baby, or a career change in the short-term. However, she noted that it is unclear how long the current higher interest rates may last, saying that if the Federal Reserve were to reduce their benchmark rate in the future, consumer accounts may be affected. To ensure a guaranteed interest rate, McClanahan advised allocating a portion of the cash into a short-term certificate of deposit.
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