Last year’s stock market volatility shocked Americans so much that nearly 2 in 3 would rather keep their money in cash than endure market swings.
That’s the latest finding from Allianz Life, which first asked the question in a recent survey of 1,005 adults aged 18 and over in December.
And data released by the Commerce Department in January shows that Americans are starting to carry more cash again. The savings rate was 3.4% in December, the highest level in seven months and the biggest month-on-month jump since July 2021.
While cash savings look more attractive now given the higher returns on safer investments, some experts worry that if Americans pull money out of the stock market to try to avoid losses, they could miss out on returns on the way back.
“If you’re holding cash trying to time the market, don’t,” Kelly Lavin, vice president of consumer insights at Allianz, told Yahoo Finance. “An attempt to time the market will fail. What we do know is that as the market improves, most of these gains will be made in just a few days. So if you miss those big days, you’ll be left behind.”
“Convenience with investing” has declined
The reality is that investing in the stock market is a concern for many Americans right now.
“We don’t have a comparison in 2020 and 2021 of the number of people sitting on cash versus investing, but one thing we can look at is the convenience of investing,” Lavigne said.
According to the report, only 19% of Americans say they are comfortable with current market conditions and are ready to invest now. That’s down from 26% in the third quarter of 2022 and 29% this time last year.
And more than three-quarters of Americans believe the market will continue to be very volatile in 2023. In fact, if markets continue to be volatile in 2023, 65% say they will need to adjust their retirement and investment plans, up from 57%. last year at this time.
“The volatility in today’s market is scary, especially for people approaching or approaching retirement,” Lavigne said. “But holding cash doesn’t help your long-term finances. Cash in a daily checking account doesn’t grow, so with today’s inflation, you’re losing money.”
Rumors of a looming recession, coupled with still-high inflation, aren’t helping Americans feel the need to take more risk when investing either.
More than three-quarters of Americans are more concerned about paying bills right now than saving for their financial future, according to the report. As a result, a majority of Americans (55%) say they either stopped or reduced their retirement savings last year because of rising inflation, and nearly half (45%) say they had to dip into their retirement savings to pay bills.
Staying out of the stock market can backfire
But missing the market now could also mean these Americans could miss the upside when the pendulum swings back, which happened after the Great Recession, when investors fled the market quickly and re-entered late.
The market’s worst days are usually followed by its best days. After every major market downturn since 1980, the market has never been able to recover to record new highs, according to research from JP Morgan Asset Management.
Over the past 20 years alone, the S&P 500 has returned 9.7% annually, but missing just 10 of the market’s best days, which typically occur less than a month after the 10 worst days, would have reduced that annualized return to 5.5%. : to the research.
Already, the S&P 500 is up more than 8% year-to-date, after a 7% gain in the last three months of 2022. That’s, of course, after the index was up nearly 25% in the previous three quarters.
“We’re definitely seeing some market jitters right now,” Rachel Elson, a financial advisor at Perigon Wealth in San Francisco, told Yahoo Finance.
“We don’t see a lot of people bailing out of the markets, even though there’s a lot of data showing that people tend to sell at the right time. However, we have some new customers who have accumulated cash and are nervous about investing; The past year has reinforced all their concerns about the markets.”
Taking a hands-on approach
One way to slowly move your cash into the market is to average the dollar over three to six months, Elson said.
“The best way to keep your brain from sabotaging yourself is to plan ahead,” she said.
If you have, say, $100,000 in cash, you can invest it in four $25,000 chunks on a certain day each month. And it is very important to diversify your stock portfolio across a number of sectors such as international, US stocks, large and small cap stocks. It spreads your risk.
“So stick to the plan,” Elson said. “Don’t think about buying on a high or a bear day.”
It also doesn’t mean you can’t invest some of your cash in safer investments.
“Many market watchers expect further pain in the stock market, especially if corporate earnings start to disappoint amid the recession,” said Michael Wagner, a certified financial planner and co-founder of Omnia Family Wealth. interview “Allocating a portion of your portfolio to a three-month T-bill that effectively pays 4.6 percent allows you to tip the can while getting paid to wait and see.”
Finding safer investments with decent returns isn’t all that difficult now, thanks to the Federal Reserve’s rate hikes. In addition to the three-year TPM cited by Wagner, six-month and one-year government bonds are now yielding about 4.6% and nearly 4.7%. And it’s possible to find a one-year certificate of deposit or CD that offers a 4.25% yield.
You can also use some of your cash back for a guaranteed, 100% cashback. paying off high interest debts such as credit card bills.
“That way,” Lavigne said, “you’re still improving your overall financial situation.”
Kerry is a senior reporter and columnist for Yahoo Finance. Follow him on Twitter @kerryhannon:.
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