I saw an interesting article in the Financial Times recently titled “Cash is still king for affluent investors” – December 6, 2013. The subtext of the article is that the amount of cash on the sidelines provides plenty of unused capital for future equity investments. Perhaps that is so. The sheer fact that investors are still nervous almost 4 years into a bull market, also suggests some other issues.
Gallup recently released findings from their Annual Economy and Finance Survey and found a record low percentage of Americans own equities directly or indirectly (via retirement plans). Only 52% of adult individuals currently own stocks compared with 65% in 2007. Some of this is related to higher unemployment since many individuals have stocks in their 401-k plans. All of the decrease, however, cannot be attributed to that alone. As the FT article explains, most individuals have a lower risk appetite today than they did prior to the market turbulence of 2008. This portends trouble ahead for many who are already saving and investing far too little.
Growing Poor – Slowly
The S&P 500 Index is up almost 250% from the March 2009 lows. A bit more than half of the adults in the U.S. have participated in this but the other half have not. Individual investors take on risk in the form of owning stocks because they need the returns to accomplish long-term goals. Simply put, it is impossible to keep up with living cost increases with bank CD’s or Treasuries. As the old adage goes, CD’s are guaranteed …to make you poor… slowly. The near term “uncertainty” of equities is the direct cause of the long term return premium.