Most investors have way too much cash. Wealthy investors really have too much.
This is a phenomenon Citi Private Bank’s David Bailin has observed whether the markets are soaring, stumbling, or stagnant.
According to Federal Reserve figures, retail investors had about 18% of their assets in money market funds and in U.S. bank deposits, considered cash alternatives, at the height of the financial crisis in 2009. But today, they still have a high percentage in cash—around 14%.
Citi Private Bank’s clients, who have at least US$25 million in investable wealth, had about 25% of their wealth in cash in 2009, but they still have 22% in cash today, says Bailin, global head of investments at the bank. For a client with US$100 million in investable wealth—and many of Citi’s client exceed that level—that’s at least US$22 million that’s not providing a return much above 1% to 2% a year.
“If a client has US$100 million, why would they need US$15 million or US$20 million in cash?” Bailin asks. “They should have it fully invested—they may need US$5 million [in cash]”.
What’s unclear is why investors hold so much cash. Given the market’s volatility since the beginning of the year, fear of investing at the wrong time is a likely explanation. But that’s not it, Bailin says. When asked, they typically say they want flexibility to invest when the time, or price, is right.... Or, they say they are planning to buy something specific with their cash in the near future—maybe a second home, or a destination wedding—and they’re “scared” of putting it into the market.
“I speak with a lot of families and I don’t think there’s a specific logic to it,” Bailin says.
“A lot of our guidance is toward that now: get cash off sidelines, augment your bond portfolio with credit risk instead of interest-rate risk, and generate income through non-traditional sources,” Taback says.
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Victor Del Giorno
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