Stashing your cash

There's growing evidence that people of all ages are keeping cash for the long-term rather than diversifying their assets in the market.

David Mccombie is an entrepreneur running a private investment company. You may think he'd be an active investor in stocks and bonds, but you'd be surprised where he keeps most of his money. "I've decided to keep my money in cash rather than the public markets because it provides me with the liquidity to react quickly," he explained. David isn't alone. A Bankrate.com survey found that overall, a quarter of Americans prefer cash to other assets. Another new study saw U.S. investors raising their cash allocations to 36% of their portfolios. That's up from 26% just two years ago.

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"Investors of all ages have been hunkering down in cash just because they don't have the stomach for the potential for market volatility," according to Bankrate Chief Financial Analyst Greg McBride. He added the aversion to investing is most pronounced among millennials, with bankrate finding 39% of 18 to 29 year olds are more likely to turn their backs to the markets and choose cash as their number one long term investment.

"The biggest risk of people hoarding cash for long-term investments is that we're going to end up with an entire generation of people that are well short of what they need to retire in comfort," Mc Bride said. He does note it's important to keep some cash to cover any short-term needs and emergencies. Plus, he said he can see the draw for risk averse individuals. "Cash is a very low-volatility investment. You don't have the ups and downs. But, favoring cash over other investment options for the long haul is a recipe for underperformance because the low rates of return will not grow your buying power. Over time you're going to see inflation eating away at the value of that money."

So, how can you optimize your savings? Certified Financial Planner Andy Smith said he has clients of all ages asking about moving money to the bank, but he points to the historical performance of the market over cash.
"There will always be recessions. There may even be, you know, a depression. But over the long term, markets return to an average level. It's just a matter of helping people feel comfortable with what's going on, explaining to them what's going on with the markets and then finding something that they're going to be a little bit more comfortable with, with their investments."

As for David, what he's comfortable with right now is sticking to cash. "I don't think this is equivalent to putting my money under a mattress because my position is really around being educated and intelligent about where we're in the market cycles and waiting for the right time to be aggressive."

Another recent survey found that more than half of Americans say they don't invest in the stock or bond markets at all. In fact, 12% of those people saying they just don't trust the market.

To read more about the survey from Country Financial regarding distrust in the stock market and investing, Click Here.