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According to a new CNBC Millionaire Survey, millionaires have moved money from stocks to cash and similar investments over the past year and could add to those allocations over the next 12 months. But the average investor may not be wise to mirror the millionaires.
Much would depend on their circumstances and the reason for the shift, financial advisers said.
A higher interest rate makes cash more attractive
According to the survey, millionaires held 24% of their portfolio in cash as of Spring 2023, significantly more than 16% in Fall 2022 and 14% as of Spring 2022.
The poll considered cash and cash investments as money market funds, checking and savings accounts, plus certificates of deposit. It surveyed 764 people with $1 million or more in investable assets and was conducted in April 2023.
A recent study by the Capgemini Research Institute also found that high net worth investors hold a record share of cash.
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On the one hand, it’s not necessarily a bad move to have more money in cash today because of higher interest rates, advisers said.
For much of the period since the 2008 financial crisis, cash accounts had paid rock bottom interest rates, meaning that investors had largely had to look elsewhere for any hope of a return on their investment.
But interest rates have risen steadily since the Federal Reserve began aggressively raising its benchmark interest rate last year to curb high inflation.
Today, cash-like accounts can yield investors up to about 5%, making it more attractive as an asset class, said Ted Jenkin, a certified financial planner based in Atlanta.
“Investors now have a choice,” said Jenkin, founder of oXYGen Financial and a member of CNBC’s Advisory Board. However, with inflation at about 5% per year, it will be roughly a net wash, he added.
However, not all accounts necessarily pay competitive rates to consumers. For example, high-interest savings accounts offered by online banks typically offer much higher cash payouts than a traditional savings account at a brick-and-mortar bank.
Affluent investors today may also have more money on the sidelines as they wait for other investment opportunities such as private equity and real estate, Jenkin added.
Why it’s not always smart to transfer more money to cash
However, for the average investor, it would be “foolish to wait in cash” instead of investing in a higher-yield investment, such as stocks, if a household doesn’t need that cash for at least five years, Jenkin said.
Still, the CNBC Millionaire Survey suggests wealthy millennials move into cash more easily than older investors. That is despite their relatively long investment horizon and ability to take more financial risk.
For example, 39% of millennial millionaires have moved money from stocks to bonds or money market funds in the past two months, compared to 26% and 18% of Gen X and baby boom investors, respectively, according to the survey.
Further, 30% of millennials plan to do so within the next year, tripling the share among older generations, the poll said.
Young investors may be nervous about the current economic climate and have a choppy reaction by moving to cash, says Carolyn McClanahan, a certified financial planner based in Jacksonville, Florida.
In fact, it seems that millionaires are hoarding money, in part because they expect a weak stock market in 2023. This is akin to trying to guess what will happen in the future, which generally costs investors in the long run.
The average investor should try to temper the tendency to flee to safety if it’s not driven by what’s best for their financial goals, said McClanahan, founder of Life Planning Partners and a member of CNBC’s Advisory Board.
Ultimately, equities have historically outperformed more conservative positions like cash and bonds over the long term.
“When you’re 20, 30 years old, it’s not smart to keep your 401(k) in cash because you’re not going to be (touch it),” McClanahan said.
When should you increase cash holdings
But there are circumstances where it might make sense to increase one’s cash holdings, she said.
There are two things households should consider when choosing an appropriate cash allocation: how much they’ll need over the next five years for expensive purchases, and an emergency fund to cover unforeseen expenses, McClanahan said.
Cash is OK as long as you understand your needs.
Caroline McClanahan
founder of Life Planning Partners
“If they need money in the short term for buying a house, having a baby, changing a career, it’s not a bad deal to have more money left over for that,” she added. “Cash is OK as long as you understand your needs.”
While cash is a good deal right now because of higher interest rates, it’s unclear how long they might last. If the Federal Reserve were to cut its benchmark rate in the future — which is not expected to happen this year — financial institutions would likely do the same for consumer accounts.
Consumers concerned about that possibility can secure a guaranteed interest rate with short-term certificates of deposit with part of their cash allotment, McClanahan said.
