For a generation that’s grown up with a smartphone in hand, millennials are surprisingly wedded to the most old-fashioned of investments: cash. That’s a conservative strategy, but it raises the specter of whether these young workers will build their portfolios quickly enough.
Americans between the ages of 18 and 29 were the most likely age group to choose cash as their ideal place to stash money they don’t plan to use within a decade, according to a survey from Bankrate.com. Thirty-nine percent of millennials said they would invest their money in cash if they didn’t need it within 10 years, triple the number who said they would buy stocks.
That could be a problem, because investment returns, compounded, tend to grow over time, if a portfolio is performing well. The more millennials earn on their investments today, the more these gains can grow throughout their working years. For Americans as a whole, one in four said they’d pick cash over other long-term investments. The report also found that Americans feel they haven’t saved enough money. For every survey participant who thought they had saved a sufficient amount, two survey participants said they don’t have a large enough savings reserve.
The report points to twin problems investors have today: a propensity to hold cash to avoid risk, alongside a nagging feeling that their portfolios won’t be large enough to support their future needs.
There are many reasons why millennials, and Americans as a whole, might feel more comfortable with large cash holdings. The global financial crisis is only a few years in the past, and many market participants might still hold bad memories of that experience. Warren Buffett’s Berkshire Hathaway now holds $111 billion in cash. Many millennials either suffered losses among their own investments during the last crisis or watched family members lose money in the markets. With cash, they’re not taking a gamble on stocks.
Similarly, the housing market crash and subprime-mortgage bust that accompanied the crisis may have sparked an aversion to buying real estate (or perhaps millennials just can’t afford to buy houses). Millennials as a group also owe record amounts of student debt, and they may feel they can’t risk the money needed to make those payments. All this contributes to a desire to hold cash rather than riskier investments that hold the potential for a higher return.
For investors of any age who want to hold a large portion of their portfolios in cash, it’s essential to consider both the interest rate on that cash and the degree to which their cash is protected by government deposit insurance. According to Bankrate.com, the average interest rate on bank deposits in U.S. savings accounts stands at 0.09%, while some online bank savings accounts pay more than 1.80% in interest, often with no minimum balance or monthly fees. Because of the power of compounding, that additional interest can make a large difference over a millennial’s long investment horizon.
As long as these online banks are guaranteed by the FDIC, the deposits are insured up to $250,000 per depositor, per account type, per bank, to guard against a bank failure. That’s essential for the investor who is holding cash to keep that money safe against all eventualities.
Here at Max, our system is ideal for investors of any age who choose to hold larger amounts of cash. Max helps depositors avail themselves of the higher interest rates paid by leading FDIC-insured banks. For millennials, signing up for Max could be a smart choice. Even if they’re not prepared to take greater risk by buying real estate or investing in the stock market, with Max they can at least earn up to 20 times the national average on the cash that’s sitting in their checking or brokerage accounts, while helping ensure it is fully protected by FDIC insurance.
Learn more about how Max helps investors earn higher yields on cash.