Cash Allocations Fall to 17½-Year Low. So says the Allocation Survey of the American Association of Individual Investors.
Why are individual investors holding so little cash?
Holding cash is painful. Cash returns nothing. Its purchasing power erodes due to inflation. But we are in a low-return environment, and inflation is low, so holding cash ought to be less painful now due to reasons of yield and inflation than at most times in history.
Is the search for yield driving people towards riskier assets? That may be part of what’s going on.
Are investors staying in risky assets because nothing bad is happening to them (yet)? Possibly.
Some of the pain of staying in cash may be due to relative deprivation, meaning we are surrounded by people who have made good money in risky assets such as stocks in recent years.
Quoting from the following article: “Specifically, the July 2017 reading of investor cash came in at 14.5%. This was the lowest level in the survey since January 2000. In fact, the only lower readings in the survey’s history back to 1987 occurred in January-April 1998, July 1999 and November 1999-January 2000.”
Looks like the only time people had less cash in their portfolios than now was shortly before the peak of the dot-com bubble. In retrospect, holding on to more cash and fewer tech stocks back then would very likely have worked better.
Would it be a wild conjecture to say that those with the patience to sit out this market in cash will be rewarded? Probably not, but I would also not be surprised if the holders of cash find that their patience is being tested further before the next crash relieves them.
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