WHEN IT COMES TO FINANCIAL SECURITY, it’s comforting to know that you have adequate cash reserves to tap when you need them. But there’s also a downside to stockpiling cash: It can drag down your portfolio’s returns and cause you to fall behind financially over the long haul.
If you’re like many Americans, you’re probably sitting on a larger pile of cash than normal after spending less during the pandemic and depositing government stimulus checks. Or maybe you trimmed your stock exposure during last year’s bear market and never got back in. The U.S. personal savings rate (the percent of disposable income people save) was 27.6% in March. That’s below the record 33.7% savings rate in April 2020, but it is nearly four times the pre-pandemic rate of 7.3%, according to financial services firm UBS. Nearly $17 trillion was held in money market funds, bank savings accounts and small CDs in January, up 24% from the start of 2020, according to Crane Data.
Economic research firm Moody’s Analytics estimates that U.S. households had $2.3 trillion in “excess savings” at the end of the first quarter. This excess savings is on top of what households would have saved if the pandemic had not occurred and their saving behavior had been the same as in 2019. Some investors have been reluctant to funnel their spare cash into assets such as stocks that have historically delivered bigger returns over time. U.S. investors had an “elevated” 19% of their portfolios in cash in April despite an improving economy and rising stock prices, a UBS survey found.
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