Why the Love of the Dollar is Killing American Futures

Matthew Carr By Matthew Carr
Emerging Trends Strategist

Retirement Planning

Millions of Americans doomed their financial futures. They now face economic mediocrity.

The panic that unfolded during the financial crisis of 2008 sparked mass fleeing from the markets, which fundamentally changed the wealth of the country.

Even today – despite record highs in the markets and gains of more than 100% from the lows of March 2009 – many Americans are still sitting on the sidelines. (In fact, Steve McDonald recently revealed in the Two-Minute Retirement Solution that 52% of investors are out of the market.)

They’re either waiting… uncertain about what to do… or still scared from the last market collapse.

The reality is this: More than 40% of Americans have nothing set aside for retirement.

And even more tragic, the 2014 Investor Pulse Survey from BlackRock found that those who do have 63% of their savings and investments in cash. More than half of that cash is sitting in traditional checking and savings accounts.

The average yield on a checking account is 0.39%. The average savings account yields 0.46%.

Astoundingly, despite this overreliance on cash, 80% of Americans believe they have the right asset allocation in place to help them achieve their goals.

Everyone should have some cash. It provides security – either real or psychological – in case something terrible happens.

But hoarding cash isn’t going to make retirement possible.

What the Wealthy Have Done Right

It seems that being wealthy – or in the “1%” – is frowned upon.

There are a number of reasons for this. But I can’t go a day without seeing at least one new article about the widening disparity between the rich and the poor… and what should be done.

Income inequality and the wealth gap have been key political platforms over the last few years. They will be critical issues in the upcoming presidential election.

But the fact is, wealthier Americans are the best set up for their golden years. And part of the wealth gap has been driven by the fundamental differences in how they invest.

For example, the average American’s portfolio is…

  • 63% in cash
  • 18% in stocks
  • 6% in bonds
  • 5% in real estate.

The more affluent portion of the U.S. population – those worth $5 million to $20 million or more – have a much different makeup of their core portfolios:

  • 30% to 40% in stocks (the higher up the rung on the wealth ladder, the more invested in stocks)
  • 10% or less in cash
  • An average of 10% or more in bonds
  • As well as key pieces dedicated to a variety of other assets.

The other interesting part of BlackRock’s survey is that, although 80% of Americans feel their asset allocation is correct (despite the huge amounts sitting in cash), approximately 45% of Americans are pessimistic about their financial future.

Something doesn’t add up.

You Work and so Should Your Money

The problem with cash is it’s essentially worthless as an appreciating asset. Even if the Federal Reserve starts raising rates – which would increase the rates of checking and savings accounts – inflation would erode a dollar’s worth.

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We’ll play a game. Let’s say you’re an average American. You make $50,000 per year and receive the average projected raise of 3% per year. And like the average American, you have $12,000 set aside and you’re able to save 6% of your salary per year.

If you keep that all in cash, after 20 years with an average yield of 0.39%, your total nest egg would grow from $12,000 to $96,647.44. Not bad when you think about it. But in reality, you deposited $80,611… and you started with $12,000.

You did a great job saving. You didn’t lose anything. But your return was minimal. You’d be living a life of mediocrity… at best.

Now, if you took those same steps, but instead put it into an investment that averaged 4% per year, your $12,000 would grow to a nest egg of $146,417.17 at the end of 20 years.

You’d have 51.5% more. You still deposited 6% per year. But got more bang for those bucks.

And if you simply took those same steps and put it in the stock market, you’d be even better off. The S&P 500 has averaged an annual return of 7.8% over the last 20 years. At that rate, you’d have $234,812.78 at the end of two decades…

20 Years checking account verses 4 Percent Yield verses Markt Return chartIn the end, that gives you 143% more than just hoarding that money in cash. You took the same steps… but instead of saving that 6% per year in a depreciating asset like the dollar, you put it to work in something that actually increases in value – the stock market.

I’m not a fan of cash. I don’t like seeing it laying around doing nothing. Every dollar I see, I think of all the pennies that could be added to it if it were only invested. Each of those pennies would eventually add up to dollars of their own. And those dollars could spin off more pennies… and more dollars.

Cash should never be king in your investment portfolio. It should be more like a vagabond, appearing briefly before getting back on the move.

Good investing,