These 2 charts explain why the rich hold 25% of their money in cash
While individual investors chase the next Nvidia (NVDA), the rich are flocking into an age-old haven. According to a CNBC survey, millionaire investors are keeping nearly a quarter of their money in one simple asset—cash.
Other surveys confirm this data.
Consulting firm Capgemini recently surveyed 3,000 high-net-worth individuals and their financial advisors. They found that wealthy investors are keeping more than a third of their portfolios in cash.
It's normal to set some money aside. But the rich’s cash hoarding is more than saving for a rainy day. It tips off that wealthier investors are taking a “wait and see” approach.
Why cash is back in vogue
Today’s market might be one of the most confusing in history. The economy is giving mixed signals, and it seems as if investors have no clue where we are headed.
It appears that growth is slowing, but unemployment is very low at just 3.7%. And although the Fed has taken its foot off the interest rate pedal, it projects more hikes due to “sticky” inflation.
Despite all this uncertainty, the S&P 500 shot up more than 15% on the year and entered a technical bull market.
So, does this rally have legs?
Investors aren’t so sure. The Cboe SKEW Index—which measures whether investors think a big market drop is likely—is at one of its highest levels in history:
In uncertain times like these, cash looks very attractive. Cash is stable, meaning it won’t fall with the market. And investors can use cash to buy up assets cheaply if the market does crash.
But high uncertainty is not the only reason rich investors are holding cash.
High rates make cash more appealing
When interest rates are low, it hurts to hold cash because yields are close to none. Not so when rates rise.
After the Fed’s ten consecutive hikes, some CDs yield higher than 5% today. For perspective, that’s in line with the S&P 500’s earnings yield—which measures how much stocks “yield” in earnings:
In other words, cash today can earn as much as stocks, but with virtually zero risk.
As Leo Kelly, Verdence Capital Advisors CEO, put it: “We’re encouraging people that it’s okay to hold cash, that it’s not just a lead weight on your ankle weighing you down. You can get a nice yield and there will be a lot of volatility in the markets and lots of chances to put that cash to work at attractive levels.”
The best ways to keep cash
All forms of cash are not created equal.
You might think of cash as just those green pieces of paper in your wallet. In investment lingo, though, “cash” can refer to a bunch of different assets.
These different assets come with different rates of return. What they all have in common, though, is offering a stable value.
Physical cash, of course, does not earn any interest. Checking accounts, which offer continuous withdrawal, earn just a bit of interest, if any. Typical rates are between 0 and 0.25%.
Savings accounts, which have some withdrawal restrictions, offer more attractive rates. At some banks, savings accounts can yield around 4%.
CDs are another form of cash that require locking up money for a set period of time. The best 1-year CDs offer just above 5% interest.
Non-bank options offer even more types of cash. Money market funds, for example, yield between 4% and 5%. Many offer overnight withdrawals as well.
Some investors consider Treasury bills to be cash due to the perceived safety of government debt
While most Treasuries currently yield above 5%, their market value can fluctuate. So investors will have to hold bills to maturity to ensure they receive the full principal value they expect.
The best choice for you depends on your specific financial situation; consult with your financial advisor.
Should you follow big money?
Nobody knows where the market is headed, but one thing is clear: many factors can still throw this bull market off track. And having some dry powder in case of a downturn may be prudent.
After all, if the wealthy are keeping a quarter of their money in cash, it has to say something.