The article then detailed another shocking statistic from a 2014 Bankrate.com study stating that 39% of respondents aged 18 to 29 say cash is their preferred way to invest money that they don’t need for at least 10 years. Being one of the major asset categories cash definitely does play a part in one’s portfolio. Cash is great if money is needed in the short run; say within the next two years because you do not have to worry about fluctuations. However, given a 10 year timeframe that money would be better off being invested in other assets besides cash because of inflation risk.
More on Inflation Risk
Inflation is an increase in the cost of goods or services, so a dollar today will not buy the same amount of stuff at some point in the future. The lack of ability to buy the same goods with said dollar is also called a reduction of purchasing power. Economies need a certain amount of inflation in order to grow, so if your cash earns less than the inflationary amount you are in trouble. Currently rates for CDs and Money Market accounts are less than 2%, unless you are locking your money in for longer periods of time. The great thing about investing in stocks is that for the risk you take on you receive a rate that is typically higher than inflation which allows your money to grow over the long run.
Emily Pachuta, head of Investor Insights for UBS Wealth Management, said in a release. "Millennials seem to be permanently scarred by the 2008 financial crisis," and that “they have a Depression-era mindset largely because they experienced market volatility and job security issues very early in their careers, or watched their parents experience them, and it has had a significant impact on their attitudes and behaviors." That change in attitude has led to an increased preference for cash with an average of 52 percent of millennials portfolios being in cash, compared to 23 percent for investors of other generations. Investors who are risk averse think that it’s a smarter bet to be in cash, not realizing that they have already lost money due to the inflation risk which cannot be avoided. In the long term, inflation erodes a portfolio’s purchasing power significantly. At an average inflation rate of 3% per year, the value of a portfolio is cut in half every 23 years or so.
The Cost of Being Out of the Market
Below is a graph that shows just how much money an investor could lose by being out of the market on the best days over a given timeframe.