Are Investors Still Hiding in Cash?

More than five years after Wall Street became the epicenter of a credit meltdown and shattered economic confidence around the world, households continue to seek refuge from risky investments. When volatility and uncertainty hit, people often become overwhelmed with fear and shift their assets into cash to avoid additional pain. Stocks have rallied in recent years, but many people still prefer cold hard money.

Cash is king for many investors. According to a new report from BlackRock, investors all of income levels in the United States held 48 percent of investable assets in cash. Only 18 percent of assets were held in stocks and 7 percent in bonds. Stocks were most widely held in Hong Kong and Taiwan, two countries that also enjoy high overall rates of household savings. The survey polled more than 17,000 investors including 4,000 Americans.

“More than ever in a new world ushered in by crisis, people at all income levels need answers on how to better manage their money for the future,” said Robert S. Kapito, president of BlackRock. “They’re understandably unnerved and are holding too much of their money in assets that are earning them nothing or that will lose value if interest rates rise. We need to let them know it is still possible for them to achieve their retirement and other long-term goals but they need to take action.”

It’s easy to understand why Americans are wary of stocks. The stock market has suffered two breathtaking pullbacks over the past decade. Between January 2000 and July 2002, the S&P 500 dropped from 1,500 to 815. During the Great Recession, the index plummeted from 1,525 to 800. With the help of the Federal Reserve and its accommodative monetary policy, stocks have recovered losses, and even made new all-time highs — but many investors still don’t trust the market.

While holding some cash can provide an opportunity for future investments, making it the foundation of an investment portfolio is dangerous over the long haul. As the chart below from BlackRock shows, cash had an average annual return of only 0.5 percent after inflation between 1926 and 2012. When taxes are factored, cash has a negative return of 0.8 percent. In comparison, stocks have an average return of 4.5 percent after taxes and inflation. Hiding in cash too long can severely damage long-term returns.

A recent report from Wells Fargo also finds a lack of trust in the stock market. Only 24 percent of middle class Americans are confident in the stock market as a place to invest for retirement, and 45 percent say the stock market “doesn’t benefit people like me.” Furthermore, 52 percent say they avoid the stock market because they are afraid the ups and downs will wipe out their nest eggs. When asked if given $5,000 for retirement where they would invest, 58 percent of those age 25 to 29 say they would invest in a savings account/CD.

Warren Buffett, the largest shareholder of Berkshire Hathaway (NYSE:BRKA), once explained how investors should view cash. He said: “The one thing I will tell you is the worst investment you can have is cash. Everybody is talking about cash being king and all that sort of thing. Cash is going to become worth less over time. But good businesses are going to become worth more over time. And you don’t want to pay too much for them so you have to have some discipline about what you pay. But the thing to do is find a good business and stick with it. We always keep enough cash around so I feel very comfortable and don’t worry about sleeping at night. But it’s not because I like cash as an investment. Cash is a bad investment over time. But you always want to have enough so that nobody else can determine your future essentially.”

Here’s how the major U.S. equity indexes traded on Tuesday:

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