Young Americans Favor Cash For Long-term Savings

NEW YORK (MainStreet) — Millennials are still opting to pour their money into cash for long-term savings, according to a new Bankrate.com report.

The youngest American adults or 18 to 29 year-olds are more likely to choose cash as their favorite long-term investment than any other age group. The study found that 39% of 18-29 year-olds say cash is their preferred way to invest money they don't need for at least 10 years. The amount is three times the number who picked the stock market, despite the fact that the S&P 500 has gained 17% over the past year while most cash investment yields remain below 1%.

This statistic is very troubling, said Greg McBride, Bankrate.com's chief financial analyst and a CFA. He points out that this age group has the biggest retirement savings burden and won't get there with low-yielding cash investments.

"They aren't going to get there with enough retirement savings by hunkering down with cash investments," he said.

Since Millennials have had a "front row seat" to how the technology bust and the financial crisis affected the finances of their parents or family members, their strategy has remained much more conservative than other generations.

"They have had a very conservative investment mindset from the get go and it will be hard to get them to switch," McBride said. "They have had a real eye opener."

In previous cycles, investors tended to change their performance based on the outcome of the market, he said. When the market was hitting its highs in the past, investors were jumping onto the bandwagon. Investors have largely refrained from doing after the 2009 financial crisis.

The market performance over the past 25 years "really put volatility into perspective," McBride said. This demonstrates to investors that even severe dips in the stock market will not harm investors if they had remained in the market and continued to invest.

"Not only did those investors do well and their portfolio generated higher returns, but they also built wealth over time and achieved their goals," he said.

Investing in cash is only appropriate for an emergency fund, but McBride recommends that investors allocate their money into equities as part of their long-term strategy for money they are not going to need for at least 10 years.

"Stocks are where the real growth is coming from him," he said. "It is a more aggressive tilt. That is how you are going to grow your money and power and harness the power of compounding."

Overall, one in four Americans prefer cash investments for money they will not need for at least 10 years. Cash slightly edged out real estate at 23% for the top spot, while stocks came in third with 19% of the vote. Fourteen percent of Americans say they would invest in gold and other precious metals and just 5% say they would choose bonds.

"The stock market records are getting the attention of some investors, as the percentage favoring the stock market increased to 19% from 14% last year," McBride added. "But overall, Americans are still risk-averse when it comes to how they invest their money." Consumers who sock away their money into cash investments instead of a 401(k) or IRA are missing out on "valuable years where your investment can compound," he said.

"Time is your biggest ally and you can not simply make it up later," McBride said. "Every year you don't make a contribution into a retirement account, you don't get to go back and make up for that. The door closes."

Cash in the current economic environment is not a good long term investment and should be used only for a cash reserve, ensure liquidity and for short-term needs only, said Andrew Carrillo, a certified financial planner with Barnett Capital Advisors in Miami.

"If CDs or savings accounts offered a positive real rate of return, then they would be good for conservative investors," he said. "There was a time when cash was gold. The dollar was fully backed by gold and the paper was just a receipt that you owned gold."

Cash has lost its value because the "Federal Reserve is creating new cash constantly, which devalues existing cash and causes inflation," Carrillo said.

"For our grandparents, cash could have been a good investment because the dollar was gold and interest rates were positive after inflation," he said. "That's no longer the case, so we need to understand that the environment is completely different and position our assets appropriately."

Conservative investors need to understand "that losing to inflation in a real loss and at 3.5% inflation, cash investments will lose 50% of their value in 10 years," Carillo said.

An investor who has allocated their funds in cash will have the price of their goals increasing at a faster rate than their assets, which means their goals will be getting further away and not closer.

"Savings accounts are basically giving the bank an interest-free loan," he said. "There is risk, but no reward. Much of investment risk is dependent on your investment time frame."

American consumers often don't understand the benefits of saving regularly and starting early, said Alexander MacAndrew, an investment director at Covestor, an online investment management company with offices in London and Boston.

People should get into "sustainable" personal finance habits such as saving $3,000 per year for 10 years during their twenties and allowing the proceeds to compound at 8%, he said. If the investor saved that amount until they turned 60, it would result in a greater total than saving $3,000 for the 30 years from age 30 to 60 at the same 8% investment rate.

"Compounding works in both directions," MacAndrew said. "People are often amazed by the example when they see how much an investment portfolio can increase over time if returns are left to compound."

In today's historically low interest rate environment, it does not pay to hold cash in a bank account, said Judith Lu, a partner and managing director at Miracle Mile Advisors, a Los Angeles-based investment firm.

"A better use of that cash is to pay down outstanding debt," she said.

- Written by Ellen Chang for MainStreet

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