Cash, the ultimate safe haven in the investment world, is suddenly the hottest trade on Wall Street.
Even though the S&P 500 index has risen 22% this year, Americans have poured more than $230 billion into money markets, funds that hold cash and short-term debt. Cash is typically reserved for investors seeking protection in times of turbulence. That means stashing money under your mattress. However, 2024 will be the second-highest year for savings since the 1970s, behind 2023.
What’s notable about this flight to cash is that baby boomers aren’t just hoarding money for retirement. Millennials are increasing their savings.
In a June study by Bank of America’s Wealth Management Division on how wealthy Americans approach their finances, the bank’s analysts found that over the past two years, 55 % increased their cash holdings, while 46% increased their cash holdings. Percentage of investors aged 44 and over. Young people weren’t the only ones worried about the economy and the risk of a sharp decline. The survey also suggested that younger respondents had an optimistic view of the economy and public finances.
During my time at eToro, a well-known retail brokerage, I saw the same puzzling trends in investor research. As of the end of 2023, 63% of investors age 44 and under said they had increased their cash allocation in the past six months (compared to just 27% of investors age 45 and older). This is despite the fact that younger investors are more optimistic about the economy, income, living conditions and investments.
There’s something driving young Americans to save cash, and I don’t think it’s just the 5% savings rate.
Millennial investors have been deeply scarred by two life-altering crises in their youth. For many Millennials, the global financial crisis occurred just as they were starting to work. Nearly a decade later, a once-in-a-generation pandemic and two brutal bear markets have dealt another blow to their psyche.
And now they are at the peak of their investing years, and the aftermath of those events has made them more risk-averse in their investments. Millennials may be protecting themselves well with their ability to save. But if wealth is built through long-term compounding returns, distrust of the stock market could reverse in the long run.
Young investors have become synonymous with rampant speculation. They trade zero-day options, jump on the meme stock rocket, and take extreme risks in the name of social media influence. Sure, some investors have had this devil-may-care attitude, and I would never criticize someone doing what they want with their money. But hard numbers from the Federal Reserve about what millennial investors actually own show this stereotype to be false.
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Despite coming of age during one of the longest stock market bulls in history, Millennials held 19% of their total financial assets in cash as of June 30, the most of any generation. This is the highest number. In a sense, this is natural. The younger you are, the less time you have to spend money on other investments. But when you compare Millennials’ cash levels to those of Gen Xers at the same age, it becomes clear that they are risk-averse. If you were born in the middle of the Millennial generation, you are currently 36 years old. These “median Millennials” had a higher proportion of their total assets in cash than Gen Xers in their 20s, a difference of about 13 points. percentage points.
But what’s even worse is that millennials were avoiding stocks at the best of times for investors. As the median age of Millennials increased from 21 to 30 years old, the S&P 500 index grew an average of 11.5% a year, but the Fed’s zero interest rate policy reduced savings account payments to nearly zero. Millennial savers not only gave up a valuable 10-year compounding investment, they also missed out on one of the longest bull markets in history.
Although the gap is starting to narrow now that most Millennials are in their 30s, survey data suggests that Millennials’ obsession with cash hasn’t fully waned yet.
There are many reasons for the recent increase in cash allocation. Savings and money market interest rates rose to 5%, providing investors with attractive risk-free returns. Geopolitical upheaval means the world feels very unstable. And Wall Street experts have been warning of a recession for more than a year. But for young investors, I think the scar is deeper than concerns about a coming economic downturn.
Millennials have had a tumultuous coming of age. Many of them were in high school, college, or starting the workforce during the global financial crisis. From 2009 to 2014, the unemployment rate for Americans ages 20 to 24 was over 10%. They learned to prioritize cash as they weathered the worst recession in history. Then, just as they were beginning to gain a foothold, the COVID-19 pandemic struck. We were stuck indoors for weeks as stock prices entered the fastest-ever crash. Shortly after, we nervously returned to the waters of wealth creation, only to be hit by rampant inflation and another bear market.
Every generation has a war story. Gen Xers had to deal with 9/11 and the bursting of the tech bubble in their late 20s. Baby boomers took on the inflation and high interest rate crisis themselves when they were 20 years old in the 1980s. Their parents were unlucky enough to experience the Great Depression, which was the darkest period for the U.S. economy for three years. But there is something particularly pernicious about having to navigate not one but two earth-shaking crises so early in adulthood.
Money can be a very personal subject. Our sense of financial security is developed through experience, not through classes or textbooks. A 2017 University of Michigan study found that children as young as 5 years old can begin to develop spending and saving habits. There is also a growing body of research suggesting that financial stress can lead to a host of physical, mental, and emotional problems. Early financial trauma can drastically change your relationship with money. That’s why personal finance management sometimes feels so illogical. Why are some of us always afraid of losing everything, even though we have plans on paper?
I know that very well. I’m a young millennial who felt the financial crisis when I was a teenager. My mother was a part-time bookkeeper for a home construction company and my father was a residential electrician. You can probably guess what happened when the housing market tanked. I may not have been old enough to open a brokerage account yet, but the financial crisis taught me bad money habits that I’m trying to fix. Today, he is still the director of research for a company that teaches people how to build financial wealth. wealth. Multiply this way of thinking over generations, and you have one group that gave us cryptocurrencies, Occupy Wall Street, meme stocks, and YOLO capitalism, and another group that can’t seem to take enough risks to build a decent retirement fund. A group will form. These cautious people piled up their savings in inflation-linked I-bonds, ultra-safe government-issued bonds that lock up your money for a year, when interest rates hit 9% in 2022. Great decision for an emergency fund, but not very wise when the stock market is hitting new lows.
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Saving too much money seems like a good problem to have, but keeping all your money in a savings account can be a big financial mistake when you consider the opportunity cost. Imagine you put $1,000 in a savings account in July 2023, at the peak of the Fed’s interest rate hike, and earned a handsome 5% APY on your cash. By October 4th, you’ll have made about $60 on that money.
How does that compare to stock market returns? Not great.
By holding on to cash and change over the past year, you missed out on the S&P 500’s 27% gain. In other words, if you had invested in a commission-free index fund, that $1,000 would have been worth about $1,277. Other major indexes also posted big gains, with the tech-heavy Nasdaq 100 up 28% and the giant Dow up 18%. Yes, even Grandma’s index beats your cash return.
Of course, stocks and cash are different financial beasts. Cash is your go-to during difficult times and is often the best place to stash funds for big purchases. It is also important to have some cash on hand. In contrast, stocks are often far from stable. Many popular stocks drop in value by 10% to 20% in a single day, and you could theoretically lose all your money invested in the stock market. But as scary as it sounds, that’s the essence of risk-taking. You will be giving up stability for greater gains over time. If you have decades ahead of you as an investor, you’re in a great position to take risks. Every little thing counts. Over the long term, the difference between a 5% and 6% return on a $1,000 investment can be thousands of dollars. In fact, America’s largest index of companies, the S&P 500, has grown about 8% annually over the past 20 years.
While long-term calculations favor moving away from cash, short-term calculations are also changing. Since the Federal Reserve began cutting interest rates in September, that sweet savings rate has been slowly eroding, with the average money market interest rate dropping to 2.75% from 2.9% at the end of July.
Dear Millennials: As a market geek who studies how the richest Americans got rich, I implore you to stop playing it safe. Cash may feel like a warm, fuzzy blanket, but lying on the couch and binge-watching Netflix won’t get you anywhere. It makes sense to keep cash in your emergency fund or as a down payment on a home. You can’t bet your retirement money on cash.
Risk is the foundation of wealth creation, so get off the couch.
Callie Cox is Chief Market Strategist at Ritholtz Wealth Management and author of OptimistiCallie, a Wall Street-quality research newsletter for everyday investors. Ritholtz’s disclosure can be found here.
