Investors Shifting to Cash over Market Fears

Investors of all ages are turning to cash in what appears to be a deliberate and longer-term fundamental change in investing, according to the MFS Investing Sentiment Survey.

The research shows investors are driven by fear, leading to a strong desire to protect their assets. Nearly three in five investors cite fear (about volatility or needing money for future uses) as a reason they hold high or increasing levels of cash. They also want immediate access to their assets and say it will take a meaningful change in either the economy or their personal circumstances to instill enough confidence for them to return to the equity market.  

Investors surveyed had on average 26% of their portfolio in cash, with Generation Y (Gen Y) having the highest cash position, 30%. The typical investor had 12 months’ worth of cash on hand, and that cash allocation is increasing for more investors (24%) than it is decreasing (12%). Sixty-two percent reported that cash is an important part of their investment strategy.   

One-quarter of respondents said they liquidated a portion of their portfolio in 2010 or 2011 because of market concerns, with 52% of Gen Y having liquidated – more than any other age group. Rising health care costs (78%), growing federal deficit (72%), and increases in taxes and legislative gridlock (both 66%) are the top concerns over the next 12 months. More than one-half (53%) feared a major drop in the stock market over the next year as well, an increase from 47% from MFS’ Investing Sentiment Survey results reported earlier this year.  

One-third viewed cash as a safe alternative in the current market, especially Gen Y investors. One-half agreed with the statement, "Keeping my savings in cash makes me feel more secure." Eighty-two percent agreed with the statement, "It is very important for me to have instant access to my cash if/when I need it" and on average, 65% of cash was held in banks.   

Only one-quarter of investors have reinvested all or most of the cash they liquidated in the past year and a half, while 35% said they will reinvest in the next 12 months, and 24% said they would not reinvest in the next 12 months.   

Consistent improvement in economic indicators (55%), leadership on a clear deficit reduction plan (45%), and sustained improvement in the global economy (40%) were the top three factors investors need to feel more comfortable investing in the stock market. However, younger investors, especially Gen Y, need to see an improvement in their personal wealth (Gen Y, 34%; Gen X, 30%) or overall personal situation (Gen Y, 37%; Gen X, 32%) before feeling comfortable investing in the stock market.   

MFS, through independent research firm, Research Collaborative, sponsored an online survey from May 31 to June 7, 2011, of 974 individual investors with $100,000 or more in household investable assets.