Meanwhile, Global Investors Flee Self-Destructively to Cash…Trevor Gerszt
Uncertainty is driving investors worldwide to bank cash at the highest levels in the last fifteen years. At first this trend was largely limited to the ultra-wealthy; after all, when you have more money than you can spend in a lifetime, you’re motivated less to chase returns than to minimize potential losses. For while high net worth individuals have the option to swallow losses due to inflation and currency devaluations, they can’t afford to lose twenty or thirty percent in a down market. That’s why as the uncertainty in global markets continues, more and more money is flowing out of the game and onto the sidelines.
This flight is sweeping up hedge funds and institutional investors as well, with average cash levels nearing nine percent. Almost overnight the world has become risk-adverse.
The problem is now the money-panic is starting to pick up small investors, and people who have a greater than ten-year window on stock market returns. Suddenly everyone’s a market timer, without realizing that the greatest enemy of your cash is time.
While it’s easy to understand the impulse that makes us feel we should be stashing our savings in the Posturepedic, the brutal truth is that over decades the toll inflation takes on that currency means if you put $300,000 in the mattress in 1985, in 2016 you’d be pulling out just $133,920.79. The buying power of your cash would have shrunk to less than half.
Everything Seems Expensive, Given the Risk
The problem is that, given the level of uncertainty in the world, assets look really expensive right now. The lack of perceived value is also pushing small investors into markets that really are overpriced, like the bond market and real estate. But too much faith in real estate also ignores the fact that the last Great Recession was triggered by a collapse of the housing market. Equities also collapsed, but one group that really got clobbered in 2008 was real estate speculators. Another basket that should never hold all your eggs.
Gold, Silver the Sole Bright Spots
The one healthy indicator in the survey numbers is the volume of Americans adding liquid hard assets, in the form of gold and silver, to their investment mix. For while cash is notoriously vulnerable to inflation’s erosion, precious metals preserve the buying power of currency over decades.
Stay in Cash and Get Hammered
Right now fifty-one percent of Americans are making cash their preferred long-term investment, which is literally like throwing it away, bill by bill, particularly for those under sixty. The lone virtue of currency is that it’s immediately liquid, which makes it great for a short-term emergency fund, and lousy for everything else.
Uncertain times like these are why it’s critical to have an investment plan that’s matched to your age and retirement goals. Being disciplined and sticking to your plan will get you through times of uncertainty like we’re seeing today.