Risk-Shy Americans Prefer Pitiful Returns of Cash Investing

Jul 29, 2013 6:00am
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More than one in four Americans favor cash when asked the best way to invest money not needed for more than 10 years, beating out stocks and real estate, according to a study by Bankrate.com.

Twenty-six percent of those surveyed preferred cash, which includes savings accounts, money-market funds, and certificates of deposit (CDs). Cash beat real estate (23 percent), gold or other precious metals (16 percent), and stocks (14 percent).

Given the high level of risk aversion, Greg McBride, Bankrate.com’s senior financial analyst, said the response “sends up a huge red flag.”

“The fact that people don’t save enough is well-documented, but people hunkering down with cash with such little savings at low interest rates has the potential of leaving millions of Americans well short of where they need to be for  long-range goals like retirement,” McBride said.

The average money-market deposit account yields just 0.11 percent, according to Bankrate.com. That means a $10,000 initial investment would only gain $110.55 over a 10-year period. And the average five-year CD currently yields just 0.78 percent.

This was the first time Bankrate asked this survey question as part of its monthly financial security nationwide poll. The survey was conducted by Princeton Survey Research Associates International, which polled a by telephone a sample of 1,005 adults in the U.S.

Not surprisingly, there was a higher likelihood for higher income households to prefer to invest in the stock market in a time horizon of more than 10 years. And there was a higher likelihood of lower-income households to prefer cash, McBride said.

Still, even among highest income households about one in five said they preferred to invest in cash.

Though many financial advisors suggest younger investors should have a higher tolerance for risk, those survey respondents under age 30 had the highest propensity to choose cash, which McBride called “alarming.”

Those between ages 50 and 64 were more likely than other age brackets to choose to invest in the stock market.

“Again, what I think you’re seeing here is a high level of risk aversion across the board,” McBride said.

One driver of this high risk aversion is “hangover” from the financial crisis as well as the “dotcom bust” back in 2000, he said.

“A lot of investors felt burned not once but twice by the equity markets. As a result, they’ve sworn off stocks, despite the fact that it is still a vital component to long-term wealth accumulation,” McBride said.

 

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