Cash is king, as the saying goes. That’s a concept that can apply to businesses, and to our own lives as well in many cases. Having money in hand offers less risk, on many dimensions, than having promise or hope for money in the future.
Pay me $100 today, or give me a promise to pay $100 next year, and I’ll take the former. To take money in the future instead of today, there needs to be a premium involved. Loaning $100 can perhaps get me $105 next year – well, not if I give it to the bank in the form of a checking account! Maybe peer lending could offer this and then some. There is risk involved, not to mention inflation.
This can apply to investments in other asset classes too, and one that jumps out is stocks. Sure, there is volatility – and if you need the money soon, stocks might not be the best holding spot if that risk bothers you. And stock returns don’t always beat inflation as one might believe, when you examine the data.
However, stocks still do offer returns better than stuffing money under a mattress. Over the long-term, you’ll generally do much better by investing in stocks than holding cash – based on historical performance.
Nevertheless, not everyone feels that way. An interesting study by Bankrate, summarized in a recent write-up on Yahoo!, showed that there are quite a few people that prefer cash as a long-term investment. In fact, according the study, nearly 40% of those between 18 to 29 years of age indicated that cash is their top choice for how to invest money that they won’t need for 10 or more years.
This is interesting, as it seems to be a real difference compared to how others might have seen stocks during that same age range. As a Gen-X person myself, I was squarely focused on stocks as they way to invest for the long-term. It’s definitely worked about better than had I kept all the money in cash.
I wonder why there is such a difference with those that are Millennials. Is it student loan debt, a shaky job market, seeing parents go through issues with jobs? Perhaps the recent housing crisis was a big influence. Or, maybe the market volatility of the 2008-2009 timeframe made a big impression.
There could be a number of reasons.
In some ways, I see a positive here. If people are now entering their working years with a more conservative approach to money, maybe that will mean an evolving attitude toward debt? Goodness knows that the U.S national debt isn’t a model for how people should run personal finance. So conservatism with money can be a good thing.
Nevertheless, cash simply underperforms stocks over the long run. Let’s just take an example of a 30 year time frame, and say that stocks earned 7% annually on average. We’ll assume 0% earnings on cash. Let’s also assume a $100,000 initial investment in each, and ignore inflation just for this exercise.
After those 30 years, that $100,000 investment in stocks (with compounding) would be worth over $760,000. Holding that $100,000 in straight-up cash would clearly leave you without that $660,000 increase. Yes, rate of return is important for financial success.
So as I see it, I can see why people might be getting more cautious with money – but would rather see this applied to debt instead of long-term investment choices.
My Questions for You
What are your thoughts on this interest in cash as a long-term investment?
Do you agree with my focus on stocks and other investments, or do you like cash long-term?
Also, I’ve given some of my reasons as to why I think there might be a flight to cash by Millennials, but I’m interested in what you think – whether or not you’re a Millennial yourself!