Markets, Retirement

Cash Allocations Remain Elevated For Many Investors

8/2/16 8:00 AM

iStock_000018447826_Small-1.jpgThe stock market has performed quite well in recent weeks, with the benchmark S&P 500 index gaining 3.56 percent in July, and as a result ending the month up 6.34 percent year-to-date. Americans’ retirement savings have likely benefited a lot from this latest run-up in equities, and new data from the Employee Benefit Research Institute (EBRI) even suggests that the average account balance for consistent 401(k) participants improved markedly in July. Younger, less-tenured workers enjoyed the strongest gains last month (+4.3 percent) but this is to be expected given these accounts’ higher overall sensitivity to plan contributions. However, even older workers with longer tenures (and larger account balances) still experienced a healthy average gain of 2.6 percent in July.

People without any exposure to the stock market, though, were not able to benefit from last month’s strong rebound in equities, and a new report from Bankrate suggests that this might have been the case for many Americans. Specifically, 23 percent of surveyed U.S. adults who were asked where they would prefer to park money not needed for a decade responded with “cash,” compared to just 16 percent who cited “the stock market.” Similarly, a BlackRock study found that even among Americans who regularly participate in financial markets, 65 percent of their wealth on average is still kept in cash. Market uncertainty and general risk aversion are likely factors behind this behavior because 36 percent of surveyed investors said that they are afraid of losing money in the stock market, and 39 percent reported that they use the high cash allocation as a “security blanket.”

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Another report from Allianz found that 37 percent of surveyed Americans do not invest any extra cash into stocks due to “fear of market uncertainty,” and more recent data from the Investment Company Institute (ICI) suggests that money leaving domestic stock mutual funds last month outpaced the cash coming in. Such an aversion to the stock market could significantly undermine some investors’ ability to grow their retirement savings since few assets can deliver long-term returns comparable to equities. A higher return, though, is often accompanied by higher risk, and an elevated cash allocation can therefore make sense for individuals close to the age of retirement. However, several financial experts believe that many older Americans can still benefit from maintaining some exposure to the stock market, even during retirement.

Determining the optimal proportion of one’s assets that should be invested in the stock market can depend on a lot of variables apart from age, e.g. an investor’s unique risk appetite and required rate of return. Since proper portfolio construction and maintenance can be an overly complicated and time-consuming process for retail investors to tackle on their own, many people should instead try to regularly work with a professional financial advisor who can simplify everything and make sure that a client’s investments remain aligned with the desired retirement outcome. At the very least, retail investors should consider utilizing a target date fund (TDF), which automatically adjusts the mix of stocks, bonds, and cash equivalents so that the holdings are more appropriate for a particular investor’s nearness to retirement.

 


 

Sources: EBRI, NAPA, Bankrate, BlackRock, Allianz, ICI, USA Today

Post author: Charles Couch