Is Your Cash Working for You?

By Dan Toledo, CFP ®

July 27, 2018

If you’re a Millennial, the odds are it’s not.

Millennials are defined as those of us between the ages of 18 and 37. Most have more than 30 years until retirement, and the youngest have 50 years before sipping Mai Tais in Margaritaville.

As a successful Millennial, you are focused on your career, your family and your own personal growth. You have worked hard and saved diligently. You are focused on what’s important to you and most important, you have time on your side.

So why are Millennials holding a significantly higher percent of assets in cash compared to older generations? A recent study by Bankrate.com found that 30% of Millennials view cash as the best place to invest money they won’t need for the next ten years. When we add gold, real estate and bitcoin, nearly 77% of us picked something other than the stock market as the best place to invest our long term savings1.

Image

Over half of Millennials surveyed say they earn less than 1.5% on their long term cash while 18.8% reported earning nothing2. These returns look even worse when we add inflation to the conversation. The Consumer Price Index (CPI) rose 2.9% over the past 12 months ending June 30th 20183. To put it another way, 19% of us just saw our purchasing power drop 3%, while the S&P 500 earned 14.37% over the same timeframe.

What makes Millennials different?

For most Millennials, the reason seems to be more psychological than financial. The Financial Crisis scared us out of the stock market. Some saw their parents’ savings fall 40%. Others watched parents lose their jobs or even their house. Many were forced to take out student loans to cover college costs their families could no longer afford.

There are a number of other legitimate reasons why Millennials are under prepared for retirement. Most are factors that affected our ability to save. However, they shouldn’t have influenced our asset allocation once those funds were put aside.

Since the aftermath of the Financial Crisis is a key event keeping Millennials in cash, let’s turn back the clock and go back to October of 2007. We are sitting at all time high’s having this same conversation. Let’s also assume that the future is known and I tell you the following events are about to happen:

  • S&P 500 subsequently declined near 55% over 1.5 years.
  • S&P operating earnings per share declined near 55%
  • Unemployment soared to 10%
  • Deepest recession since the 1930's
  • Federal debt grew to 100% of GDP

You are then given the option to keep your savings in cash or jump into the market. Once your decision is made in this hypothetical example, it’s locked in and you’re forced to live with it.


To put it another way, 19% of us just saw our purchasing power drop 3%, while the S&P 500 earned 14.37% over the same timeframe.


Those with the fortitude to invest in the S&P 500 in October of 2007 and hold onto their positon through December of 2017 saw their wealth increase 118.50%. Their annualized return was 7.9% and every $1 invested turned into $2.2.

Image

Figure 1: Growth of $1 since the 2008 Financial Crisis in the S&P vs. Inflation, measured by the CPI.4 Courtesy of DFA.

The rest of us hopefully at least kept up with inflation and earned the CPI’s total return of 18.24%. Your annualized return was 1.65% and every $1 in your savings account turned into $1.18. Going back to the Bankrate.com study, 19% of us didn’t earn a penny.

Some of you are reading this thinking about how you’d have chosen option three. You are telling yourself you would have held onto cash until march of 2009 before going all in and tripled your returns. Given all of that negative information, you would have seen the crash coming and timed the market correctly. In reality, you didn’t. Instead, you’re sitting on cash reading my blog and not working for Goldman Sachs.

Academics and most financial planners agree that market timing is a loser’s game. Thousands of professional investors and computer algorithms try to time the market every day. Most of them fail, but all of them have better information and more financial knowledge than you. If they can’t predict the markets, neither can you.

If you can’t time the market or predict the future, then what can you do?

For most the answer is simple, but uncomfortable. Getting off the sidelines isn’t going to be easy, but it will be necessary. 10+ years of sitting in cash has lost you real money and increasing inflation will continue to erode its value over time.

Talk to a financial planner or trusted friend. Create a plan to transition your long-term savings from cash to stocks. Make a decision to go all in or commit to dollar cost averaging over time. Then go be a Millennial. Travel the world or find a new hobby and never sell out.

Dan Toledo, CFP® is a Senior Advisor at Chicago Partners Wealth Advisors. Dan is a Level III CFA candidate and has been helping individuals, institutions, and foundations manage their wealth for over 8 years.


1https://www.cnbc.com/2018/07/26/77-percent-of-millennials-are-wrong-about-the-best-way-to-save.html?__source=yahoo%7Cfinance%7Cheadline%7Cstory%7C&par=yahoo&yptr=yahoo

2https://www.bankrate.com/investing/financial-security-july-2018/

3https://www.bloomberg.com/news/articles/2018-07-25/trump-suggests-cutting-all-tariffs-ahead-of-key-meeting-with-eu

4DFA Performance Returns Report

Important Disclosure Information

Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Chicago Partners Investment Group LLC (“CP”), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from CP. Please remember to contact CP, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. CP is neither a law firm nor a certified public accounting firm and no portion of the commentary content should be construed as legal or accounting advice. A copy of the CP’s current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request.

July 27, 2018

If you’re a Millennial, the odds are it’s not.

Millennials are defined as those of us between the ages of 18 and 37. Most have more than 30 years until retirement, and the youngest have 50 years before sipping Mai Tais in Margaritaville.

As a successful Millennial, you are focused on your career, your family and your own personal growth. You have worked hard and saved diligently. You are focused on what’s important to you and most important, you have time on your side.

So why are Millennials holding a significantly higher percent of assets in cash compared to older generations? A recent study by Bankrate.com found that 30% of Millennials view cash as the best place to invest money they won’t need for the next ten years. When we add gold, real estate and bitcoin, nearly 77% of us picked something other than the stock market as the best place to invest our long term savings1.

Image

Over half of Millennials surveyed say they earn less than 1.5% on their long term cash while 18.8% reported earning nothing2. These returns look even worse when we add inflation to the conversation. The Consumer Price Index (CPI) rose 2.9% over the past 12 months ending June 30th 20183. To put it another way, 19% of us just saw our purchasing power drop 3%, while the S&P 500 earned 14.37% over the same timeframe.

What makes Millennials different?

For most Millennials, the reason seems to be more psychological than financial. The Financial Crisis scared us out of the stock market. Some saw their parents’ savings fall 40%. Others watched parents lose their jobs or even their house. Many were forced to take out student loans to cover college costs their families could no longer afford.

There are a number of other legitimate reasons why Millennials are under prepared for retirement. Most are factors that affected our ability to save. However, they shouldn’t have influenced our asset allocation once those funds were put aside.

Since the aftermath of the Financial Crisis is a key event keeping Millennials in cash, let’s turn back the clock and go back to October of 2007. We are sitting at all time high’s having this same conversation. Let’s also assume that the future is known and I tell you the following events are about to happen:

  • S&P 500 subsequently declined near 55% over 1.5 years.
  • S&P operating earnings per share declined near 55%
  • Unemployment soared to 10%
  • Deepest recession since the 1930's
  • Federal debt grew to 100% of GDP

You are then given the option to keep your savings in cash or jump into the market. Once your decision is made in this hypothetical example, it’s locked in and you’re forced to live with it.



To put it another way, 19% of us just saw our purchasing power drop 3%, while the S&P 500 earned 14.37% over the same timeframe.


Those with the fortitude to invest in the S&P 500 in October of 2007 and hold onto their positon through December of 2017 saw their wealth increase 118.50%. Their annualized return was 7.9% and every $1 invested turned into $2.2.

Image

Figure 1: Growth of $1 since the 2008 Financial Crisis in the S&P vs. Inflation, measured by the CPI.4 Courtesy of DFA.

The rest of us hopefully at least kept up with inflation and earned the CPI’s total return of 18.24%. Your annualized return was 1.65% and every $1 in your savings account turned into $1.18. Going back to the Bankrate.com study, 19% of us didn’t earn a penny.

Some of you are reading this thinking about how you’d have chosen option three. You are telling yourself you would have held onto cash until march of 2009 before going all in and tripled your returns. Given all of that negative information, you would have seen the crash coming and timed the market correctly. In reality, you didn’t. Instead, you’re sitting on cash reading my blog and not working for Goldman Sachs.

Academics and most financial planners agree that market timing is a loser’s game. Thousands of professional investors and computer algorithms try to time the market every day. Most of them fail, but all of them have better information and more financial knowledge than you. If they can’t predict the markets, neither can you.

If you can’t time the market or predict the future, then what can you do?

For most the answer is simple, but uncomfortable. Getting off the sidelines isn’t going to be easy, but it will be necessary. 10+ years of sitting in cash has lost you real money and increasing inflation will continue to erode its value over time.

Talk to a financial planner or trusted friend. Create a plan to transition your long-term savings from cash to stocks. Make a decision to go all in or commit to dollar cost averaging over time. Then go be a Millennial. Travel the world or find a new hobby and never sell out.

Dan Toledo, CFP® is a Senior Advisor at Chicago Partners Wealth Advisors. Dan is a Level III CFA candidate and has been helping individuals, institutions, and foundations manage their wealth for over 8 years.


1https://www.cnbc.com/2018/07/26/77-percent-of-millennials-are-wrong-about-the-best-way-to-save.html?__source=yahoo%7Cfinance%7Cheadline%7Cstory%7C&par=yahoo&yptr=yahoo

2https://www.bankrate.com/investing/financial-security-july-2018/

3https://www.bloomberg.com/news/articles/2018-07-25/trump-suggests-cutting-all-tariffs-ahead-of-key-meeting-with-eu

4DFA Performance Returns Report

Important Disclosure Information

Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Chicago Partners Investment Group LLC (“CP”), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from CP. Please remember to contact CP, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. CP is neither a law firm nor a certified public accounting firm and no portion of the commentary content should be construed as legal or accounting advice. A copy of the CP’s current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request.