In the current low interest rate market, investors with a large proportion of their investable assets in cash are potentially exposing themselves to a negative real rate of return, despite a widespread understanding that investors need to be more aggressively positioned in order to meet long-term goals such as purchasing a home or retiring on schedule.
State Street Global Advisors’ SPDR ETF business has today released a new Practice Management paper titled ‘Are You Leaving Cash on the Table’, which has found 40% of the average individual’s investible assets are held in cash due to its apparent predictability. The research found that similarly to real estate, investors’ tendency to flee to cash is because they find cash simple, tangible and safe.
This however, presents an opportunity for advisers to reshape the ‘cash conversation’ with investors and determine what investment options reflect the right approach to achieving their personal goals. Our research has found that investors who work with an adviser have less than 1/3 of their portfolio in cash.
Key stats:
– 40% of the average individual’s investable assets are held in cash;
– 40% of investors said they needed to “become more aggressive” over the next 10 years to prepare for retirement while 23% said they were not planning to take new financial steps;
– When asked to identify their best investment to-date 43% listed the purchase of land or property followed by stocks and bonds, garnering 23% of the vote;
– When asked to project what their asset allocation would look like a decade from now, cash remained the dominant holding in their investment portfolio;
– Largest factor stopping investors from putting their money into more productive assets is the predictability of cash.
Strategies:
– Assess your cash position – while many planners recommend an emergency fund equal to 3 to 6 months of a client’s fixed and variable expenses, investors need to realise that holding excess amounts of cash is in itself an investment decision, which is accompanied by its own set of risks;
– Follow the numbers – investors also need to understand that the interest received in a bank account is often exceeded by the rate of inflation. This means that the actual purchasing power of cash and equivalents will usually decrease and these supposedly “safe” assets can actually harm investors in the long-run;
– Plan collaboratively – investors and their advisers should work together to consider all assets and liabilities when creating a financial plan. This broadened discussion can help identify the tendency to flee to cash or property when a diversified set of investments is actually more appropriate for reaching long-term goals.
