According to data from the
Center for Applied Research at State Street Corp., a large asset manager and
custodian, investors around the world, at all asset levels, are stockpiling cash.
This is despite the five-year growth pattern of the market. Over the last five
years, investors have increased their cash allocations from 31% to 40% of their
Cash holdings vary widely
around the globe. The highest is in Japan, at 57%, and the lowest in India, at
26%. Investors in the U.S. fall in the middle, with an average cash position of
36%, which is up from 26% in 2012. The State Street poll was conducted its in
the first quarter of 2014 and defines cash as money in savings and checking
accounts and cash equivalents, such as money market funds.
One of the reasons for the
recent stockpiling of cash is that many investors are haunted by the 2008 crash
and is consistent among different age groups. While the baby boomers (ages
49-67) have 41% of their money in cash, Generation X (ages 33-48) and the
Millennials (under 33) each hold nearly 40% in cash, as well, despite the fact
that they have years to go before retirement.
To be sure, the cash figure
includes emergency reserves, which ideally should be held in cash or cash
equivalents. Still, the allocations are higher than what experts think is ideal
for many households. As a general rule of thumb, investors should subtract
their age from 100 to determine the amount to hold in equities, which deliver a
higher average return over the long run.
State Street also conducted
a financial literacy test and overall, investors globally performed badly. The
financial literacy quiz posed 13 questions on topics including fees, returns,
and active versus passive management.
Respondents in Singapore
scored the highest, with a grade of 70%. Americans, who ranked tenth out of the
16 countries polled, earned a grade of 60%. Respondents in Japan,
Germany, the United Arab Emirates, India, Netherlands and France scored even
worse than the U.S.
The findings of the
financial literacy test show that nearly half of investors don’t know the
annual return of their investments and 64% are in the dark about the fees they
pay. Only 15% are aware that passively managed investments—such as index
funds—are cheaper than actively managed funds. And more than one-third believe
that bonds “help minimize the impact of inflation, when in fact bond returns
are highly vulnerable to inflation increases,” State Street says.