If you have a top 1% net worth, you're rich. Good for you. The question is: why do the rich hoard so much cash? If you also have a top 1% income, there is no need to have such a big savings balance.
The rich are bullish on the economy just like the investing middle class. The difference I've noticed from surveys and speaking to people of both classes is that the rich hold much more cash (risk free assets) as part of their net worth as compared to the average person.
Citi Private Bank came out with a survey of 50 representatives who manage high net-worth families that nearly two-thirds of their clients think it's more likely the stock market will go up at least 10% in the coming year than lose value. I can get behind this bet.
Yet these same wealthy investors have, on average, almost 40% of their portfolio in cash with stocks averaging only 25% of their portfolios! The rest are in bonds, commodities, and real estate. 40% is a shockingly high number that completely goes against the wealthy class's beliefs about the future.
I get prodded by young investors who've never seen a bear market all the time on why I have some of my net worth in 3.5-4.2% yielding CDs. Usually I just smile and move on because there's no use arguing when times are good because everybody thinks they're a genius.
This post attempts to understand why those with financial means stay conservative even in a raging bull market. I've spoken to dozens of multi-millionaires about their net worth asset allocation and have found similar, but not as extreme high cash allocations. These findings run very counter to the young bucks I encounter with $150,000 stock portfolios that make up 90%+ of their net worths.
Why Do The Rich Hoard So Much Cash
1) Easy come, easy go.
Most rich people did not inherit their money. Their fortunes were either created through hard work, risk taking, savvy investments, aggressive savings, or a combination of everything. When you are self-made, your appreciation for money goes way up because money wouldn’t be there without your efforts. Rich people realize they can return to non-rich status in the blink of one bad investment.
If you lose 50% of an investment it takes a 100% return to get back to even. There have been too many downturns over the past 15 years to be fully invested in any asset class. Diversification is more important for the rich because their main goal is to protect their fortune at all cost. If you're taking investing advice from someone who only started in 2008-2009, you deserve to lose all your money.
2) Opportunity.
The rich hoard so much cash because they are always looking for investment opportunities.
One of the main reasons why rich people are rich is because they recognize investment opportunities when they arise and jump all over them. I mentioned in a previous post that we should never stop fortune hunting because if you never look, you're almost guaranteed to never find opportunity. Very rarely does something just fall in our lap. Some opportunities are probably staring us in the face right now, but we don’t have enough imagination or guts to make a move.
3) Satisfied with what they have.
Once you’ve built a large enough financial nut, the goal shifts from growth to protection of principle. In a large way, rich people with large cash balances are the least greedy of all because they’ve discovered what's enough to make them happy. There's no need to chase after the next hot growth stock.
The incremental desire to make another $100,000 when you've got $5 million isn't very strong. But the desire to protect a 3% risk-free, $150,000 a year cash flow stream is very important if the individual can comfortably live on such an amount. It's common practice for the media to portray the rich as greedy which is why every single rich person is encouraged to practice Stealth Wealth.
4) Responsibility to others.
Rich people feel the duty to support others who are less wealthy. If you are the only rich person in your extended family, you may be called on to pay for your niece and nephew’s college tuition as one rich person I interviewed explained for example. You may feel obligated to consistently give to charity who has depended on your money for years.
No matter how hard you worked for your money, you’ll feel an elevated responsibility to give back in part because you are surrounded by people and images of people who have less. By having lots of cash on the balance sheet, the rich can give much more freely. I'm pretty confident the rich are actually much less greedy than the middle class because when you have money, your actions are no longer dictated by making more money anymore.
Related: Strong Reasons For Hiring A Financial Advisor Or Investment Manager
5) Increased happiness.
The rich hoard lots of cash because they ultimately want to have peace of mind.
As we've learned in a previous article, saving more money continuously increases happiness compared to making more money where happiness plateaus around $150,000 – $200,000 a year. Cash is King except for in a bull market. That said, having a ton of cash on hand provides a pece of mind no other investment provides. The cash amounts are highly correlated with the rich person’s minimum standard of living to be happy.
If the rich person can be happy living off their cash, then everything else is gravy. It’s like going to the casino and betting with the house’s money. You can’t lose unless you draw down your cash and leverage up in a bad investment.
Related: Solving The Happiness Conundrum
6) Greed
At least, we come to the topic of greed. The rich clearly hoard so much cash because they are greedy, just like the rest of us. It is human nature to always want more, especially if we keep comparing ourselves to other people.
The billionaires in San Francisco could easily donate some of their wealth to help eradicate homelessness. But they do not, because they want to keep more of their billionaires. Even though they can't spend all their money, they always want more because they can't stop comparing themselves to even richer people.
We could all do more to donate to charity. Money and time.
Enjoy The Good Times While They Last
Those who are not rich surely experience the above five points to some degree as well. However, I think the difference is more pronounced the more you have because our risk tolerance does not commensurately increase in an absolute dollar level.
For example, if a person loses 30% in their $200,000 retirement portfolio, that’s a $60,000 loss down to $140,000. $60,000 is a lot of money that will surely sting. However, the $60,000 is recoverable through even a median household income of $52,000.
If one loses the same 30% on a $5 million portfolio, recovery is extremely difficult unless the person’s income is in the multiple six figures or more. As a result, those with larger net worths tend to be more conservative with their investments. A 25% allocation of a $5 million net worth is still $1.25 million.
The most common case for someone with a multi-million dollar investment portfolio is an older person who invested for decades and is now retired. Given the weakened earnings power of the older individual, there is no way s/he will rational invest as s/he once did.
The pain of losing a certain amount when we are rich vs. when we are poor is not the same due to the absolute dollar amounts. Therefore, they have a lower safe withdrawal rate in retirement. It's natural the rich hoard more cash the higher their net worth.
Hoard Cash, But Spend It As Well
It’s easy to say you’ll invest during economic Armageddon when you aren’t in economic Armageddon. It's easy to say you hope for a pull back when you don't have much money. But nothing happens in a vacuum. If there is another economic disaster, that also means your income and your job are also at risk. I firmly believe you only know your true risk tolerance when you are in the middle of chaos.
The bull markets in stocks and real estate have lasted since 2009. Valuations are fully valued in my opinion. There might very well be a pullback, especially if we start seeing aggressive tapering. The one thing we have going for us is that the government is in absolute cahoots with investors.
The Federal Reserve would never do something as stupid as pull the entire bond buying rug out from under us. It's all about being very accommodative for as long as possible. If there is a pullback, let's hope you have a hoard of cash to take advantage!
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Hey Sam long time lurker here, wanted to rehash current cash climate position. Been racking my brain on my correct asset allocation given the current climate. After calculating my current net worth I’m a hair under 7 million. At 35 I have been finding my self more conservative in the last year with trying to protect this as I’m wanting to transistion away from my business I have been involved with since my freshman year in college. Your approach is so refreshing to me and modeling something under that method is what I want to achieve.
I’m neutral real estate as i own my home free and clear of any debt. Have owned 2 rental homes and a 25 unit apartment complex and don’t want to go down that road again. More passive income streams desired. My current % breakdown is as follows.
Equity portfolio 24% conservative right now, dividend heavy. 30 equity, 70 fixed income. Went this way about 2 months ago from 65-35 equity’s/FI
Business assets 36%
Cash 21%
Home 16%
Art and gold 3%
Am I too conservative on my portfolio given my age? Should I take cash and go more into the market given I don’t want to go buy property? Your blog is an awesome everyday perspective to what many struggle with keep up the awesome work.
Great article. I am holding chase right now in my retirement accounts because everything is expensive right now. I am waiting for a drop. I still have 15 more years of work so I keep most in stock for now but this makes me think about later a lot more. ;)
The wealthy invest in items that the government can’t trace so they avoid taxes. Diamonds, gold, platinum, exotic watches and the list goes on and on. Why stocks when they can be traced?
Wrt the topic of why the rich keep so much in cash – my sense talking to wealthy folks and financial advisors of said wealthy is they are really good with their jobs but know very little about finance. Most are not Warren Buffets. They are subject to herd mentality just like everybody else as Robert Schiller amply demonstrates in his behavioral economic research. Short of the few financiers like Warren Buffet who actually grok investing and market fundamentals, I would not read too much under the tea leaves as to why the rich are so wisely not all in stocks.
If anything, watch Schiller’s Nobel lecture where he totally destroys the notion of economic rationality, slamming the two other Nobelists who built the edifice for efficient market hypothesis and its assumption of rational economic actors consisting of the rarefied wealthy. Rationality is a myth. The deconstruction of the wealthy is probably closer to palm reading decision making. Schiller’s Nobel lecture in the last 3rd of this video is pure gold. https://www.businessinsider.com/robert-shiller-nobel-presentation-2013-12?op=1
Good point about the wealthy good at their jobs or their business, but not so good at making money from money. Hence why there are folks like Warren who you can buy and manage your money for you!
I keep driving costs down minimizing expense levels while only keeping 6 months of cash equivalents on hand. During the financial crisis I doubled that to a year.
Short of a nuclear war, keeping too much cash on hand is unnecessary ballast. Yes, markets go down. They also gain/recover/recover. Since nobody can time the market, the single biggest reason why people lose to the market is they miss out on the top dozen days of gains/recovery of the year which account for 80% of the gains/rebound.
I saw the speed by which the Fed and Treasury instituted TARP, then stress tests, then QE. In two years time, they resolved a financial crisis of confidence that continues to plague Europe today. So I took a calculated risk san emotion surmising a 2nd great depression was not in the works. That a trough to peak would take about a year.
Meanwhile I had cash on hand. The market had ample zero percent credit to afford me. Albeit I did shift ⅓ of my stocks to a blend fund which had 40% in treasury bonds, I was still in the market for the most part. Looking back it was the best decision I made, second only to divesting out of my employer Microsoft’s stagnant stock halfway into my career.
Long story short, 2007-2009 provides a real world case study bounding the degree by which the modern world can fall apart. And this hyperbole about QE costing enormously blows what basically is an economic blood transfusion to boost the velocity of money so the economic body did not suffer economic rigamortis.
The markets have presently fired on all cylinders suffering a bit from margin compression fueled by productivity-driven earnings overshooting the real economy for the most part. Now we are finally at a point where jobs per month are tracking 195k a month and with it capital goods and consumer spending and dare I say housing. The recovery of the real economy is finally coming online.
I quit work this year to manage our family portfolio whose 1-year yield so far has doubled the market’s at 48.6%. The market has overshot and priced a lot of the earnings upside for 2014 already some could argue. But the main point stands insofar as cash is concerned. Unless you truly believe the end of world is upon us, that the Fed’s QE blood transfusion will make this country go broke somehow, whose mechanisms and economics undefined, then cash and gold it is.
But I can up the somewhat paranoid ante. if things get really bad, and say the US defaults on treasuries, dollars and gold will be meaningless. Try buying a loaf of bread on the street with a gold bar or coin the day after. You won’t be able to without getting robbed at gunpoint.
I recommend calming down a bit and looking at 2007-2009 as a great life lesson that shows the boundaries and outlines of what fubar economic situation looks like. Stash a year or two’s cash if you must, but I definitely would not put away more than ⅓ of your assets to that end. The real economy is just picking up, the USA is still the best performing economy in the world, despite the long-standing hype on emerging markets, alongside a Keynesian-reinspired Japan, and frankly I think 2014 is just another day that will be an extension of 2013.
A 2014 that is not as hot as 2013 but certainly with no signs of free-fall either. I will continue to live frugally. Make my money work for me. My dream is within 5 years time is to live as much as possible from long-term capital gains that I can withdraw annually $72,500 at a time, at a zero percent long capital gains tax rate. With cars paid off, low-interest mortgage in tow, that is plenty to live on.
Of course, I will also have limits set on all my trades just in case.
I look forward to having this problem at some point, i.e., playing defense with cash!
I’m waiting for the other financial crisis shoe to drop.
The ramifications of the massive amounts of free money pumped into the economy in the last 5 years are still to be determined. Especially considering a stock market where everyone is rooting for it to go higher while keeping an itchy trigger finger always on the “Sell” button….
Don’t think it will for a long, long time. Might as well extract as much money from the artificial propping as possible no?
So where is your perceptions for the upcoming year going to start out regarding balancing your total portfolio: equities, RE, bonds. If you don’t mind me asking?
I think I’ll write something in my newsletter this month. Things continue to look good for 2014.
Really interesting post Sam! I am in that 6 to 10% range. Prior to purchasing my new house prior this year I would have said I was 40%+ in cash. Interestingly, there was an empowering feeling that came with it. I believe the feeling came from the fact that if anything happened at work I had months upon months upon months of expenses saved up.
Hey Sam,
An interesting post suggestion: Purchasing real estate with cash versus a mortgage…. Seems much controversy there. Good arguments on both sides!
I have run multiple scenarios through my head on this issue….. The math favors mortgage, but “black swan” events sort of favor cash. I draw no conclusions!
Sam–
My 81 year old mother (who does not have the Internet) called me really upset about advice she read in the Inquirer about retirement–‘a shorter life span’. She thought if you lived too long you wanted people to commit suicide. I just looked up and saw the article online. I trust the Inquirer was quoting you out of context and it looks that way. It was in the context of hoarding and irrational behavior, unfortunately it does not come out that way clearly. Of course there is a point that people care about charities and descendants which really need money so there is argument to save as much $ as possible.
Here is the passage:
Are some retirees so set in their ways that they continue saving money when they no longer need to? This post at FinancialSamurai.com, a site by early retiree Sam Dogen, outlines how “prodigious savers can break our financial habits.” Dogen’s site promises tools for “slicing through money’s mysteries.” One of his surprising points is to reconsider how long you’ll live. Keeping a shorter life span in mind could free you up to spend more, he contends. If that sounds a bit dicey, remember that Dogen is talking to hoarders who need to be jolted from their oversaving ways
Read more at
Very interesting that Philly.com doesn’t even link back, which is why I didn’t even get a notice.
Not sure where the me wanting people to commit suicide comes from. Might be an unfortunate projection of what your grandmother might have been thinking at the time J.
The idea is to expect to live younger so you can will yourself to spend more since you’ve got a problem with oversaving/hoarding. Hoarding is bad imo b/c you’re not spending the money on people who may need your help.
I read this in the Inquirer. I take it your quotation was taken out of context and just meant hoarders who cannot possibly achieve some sort of irrational lifespan.
Of course there is an argument that if we care about an (or more than one) institution/college/family/cause/church we would like to leave as much money as possible to help the cause/family. So many non-profits are really struggling.
The problem is the Inquirer makes it sound like you’re advocating when people get too old (plan for a shorter life span) they should commit suicide, even though prodigious savers is mention it’s easy to miss and not all that clear. Here is the passage and entire quote from you:
Are some retirees so set in their ways that they continue saving money when they no longer need to? This post at FinancialSamurai.com, a site by early retiree Sam Dogen, outlines how “prodigious savers can break our financial habits.” Dogen’s site promises tools for “slicing through money’s mysteries.” One of his surprising points is to reconsider how long you’ll live. Keeping a shorter life span in mind could free you up to spend more, he contends. If that sounds a bit dicey, remember that Dogen is talking to hoarders who need to be jolted from their oversaving ways
Read more at
Sam,
Somehow I can’t help but think that our previous threads sparked the idea for this post?
I’m old…. (Although I don’t feel old). I have seen far to many bad things happen and my parents were immigrants, who survived the worst. I heard about the horrible things which happened to them when I was a child.
My opinion is that you don’t know what you don’t know! Be conservative. Always balance your high risk investments with risk free (kind of a barbell strategy). When things go wrong, they frequently go wrong, very badly! Cash is basically “super insurance”. When things go bad, you can never have enough insurance.
One point that seems to be missed is many wealthy people are business owners, so their company is basically a large growth stock, and a “risk” asset. Hence, they balance that risk with a large cash and bond position. If you include their company value as a stock, their overall wealth asset allocation will probably look more typical.
I think the cash is probably in their business. It is like much larger corporations who are holding cash for acquisitions or to maintain liquidity. Since most wealthy people are my age or older, they have seen the ups and downs of the market (stock, commodities & real estate), I think that may be some of the reasons for cash hoarding.
Nice. Does that mean 64% of your portfolio is in stocks?
10-year yield up to 2.93% now as of 12/19/13! I’m a buyer at 3%. But once it hits 3%, it might rocket a little higher on panic selling.
Sam,
If you are concerned about inflation, why not TIPS?
I’m not too concerned about inflation. Inflation has been coming down for 30 years in a row.
How do you invest in the 10% yield? Are you talking about bonds?
We have less than 5% in cash. We do have quite a bit in bond funds though.
I would be more willing to put more in cash if the interest rate is a bit better. It’s just discouraging to get 1% when the stock market goes up 20+%.
I couldn’t agree more, although I switched out to about 30% cash today. This year was a CRAZY but fun ride up. Every fund that I had invested in was up 28% or more, with some as high as 35%.
I didn’t want to pull it all back out, but I believe there MIGHT (mostly a feeling) that next year will be somewhat similar to this year where there’s a pull-back within the first quarter, and then if unemployment, etc. continue doing well, the market will rise another 15% next year. I just don’t want to hedge my money to be more than 70% in right now.
<1%. A lot less. A market correction would hurt, but it would not be devestating. 2008 with a job loss would be devestating. Hmmm. Once again you have me reconsidering whatever the hell it is I am doing in life Sam.
Right now, I have more fear of what I would buy if I had $100K in cash. Probably a new SUV, a nice watch and a trip to Croatia (I am good on sunglasses for now). I tend to spend what I have and not touch 'investments' so I almost never go above $5K in checking and savings. Whenever I get a $5k+ cushion, it goes to Vanguard or an REIT so I cannot spend it on depreciating stuff. Maybe I will work on a CD ladder next year.
How do you have a lot less than 1%? :) Are you leveraged?
No levereage at all. I have 0 debt of any kind. I have IRAs, 401K, SIMPLE, ROTH IRAs, kids 529. Non tax advantaged accounts of Vanguard index funds and company ESPP. I have a paid for house and car. I just have very little actual cash. I have no monthly credit payments and my monthly nut is about $1K for utilities, insurance and food, I just do not need a bunch of cash. I have $5K in my bank now and the only reason it is so high is that I have a $4500 tuition payment due in a week or so. After that I will have about $1000 at any given time. Yes, I know I am a blown furnace or transmission away from having to sell some stock, but I am OK with that. I had no real emergencies in 2013 and I plan to build a little cash buffer in 2014. I just need to figure a way to have a stash of cash and not spend it. Since I was old enough to know what money was, cash has always burned a hole in my pocket.
Never really considered the fact that once you have a certain amount you don’t really care as much about big returns on your investments. I’m young and looking for that big success so I keep only 20% of my assets in cash.
Another spot on article! I’m about the 15% hard cash range, but if you count cash equivalents into the mix and its much closer to 40%. I’m about 20% equities. As the number gets bigger and bigger you only need to hit singles…you’ve already won the game. I just happened to take a look at what I’ve paid in federal income taxes this year & I almost threw up in my mouth…if I didn’t truly love what I do I would definitely hang it up. How the high income earners in California tolerate it, I have no idea. Merry Christmas!
What are cash equivalents by your definition?
When I was playing tennis yesterday in 70 degree whether at 11:30am, I felt a little bit better paying 9.8% state taxes :)
O.k. so I am a little jealous of your weather! I guess I call cash equivalents stuff that can be liquid by close of business and have a extremely low volatility.
Sam would you say now is the WRONG time to invest in CDs… with the recent announcement of the fed tapering QE? They were more coy on short-term lending rates though, so I suppose we could see low interest rates for a while yet…
I think it’s suboptimal to invest in CDs now. A 7-year CD is at 2.3-2.4%. The 10-year yield is at 2.93%.
The problem is, banks are flush with cash, hence why they charge so low. The irony is that there needs to be some type of ASSAULT on financials like a good old bank run. Once deposits run low, they will have to raise rates again.
Sam, you can check out this link at Vanguard, and buy FDIC insured commission-free CDs with a 2.7% 7-yr and 3.4% 10-yr rate. https://personal.vanguard.com/us/funds/bonds/bonddesk
Banks are flush with cash because of the artificially-low Fed lending rate of 0%-.25% enabling banks to borrow for essentially zero cost. The “taper” has begun, but bond-buying still exists at a rate of $900 billion a year and looks to be in place for a year or more. Banks don’t need our CD deposits! Normalizing rates for bank-borrowing will lead to normalized CD rates.
What would your suggestion be for risk-free investments then? Trying to lower my cash allocation…
10-year bond is at 2.93%ish. You can buy the ETF, IEF. But bond yields could go even higher, so watch out. You can go buy the actual 10 year bond and hold for 10 years and get all your principal back earning 2.93% too.
Sam, You hit the nail right on the head. I’ve currently have 60 percent of my net worth in cash and cash equivalents. 30 percent stocks, 10 percent real estate. My cash is 25 years of good living expenses. My stocks should cover another 25 years by the time I need the money.
My reasoning for so much cash is just what you said. I worked to hard and saved to long to risk my principal. Enough is enough for me, and like your article I do have responsibilities to family and charities that are very important to me.
Another benefit of having so much cash is time. I can afford to wait till interest rates return to normal. Then I get some of “the gravy.”
If your stocks can cover 25 years at 30%, does that mean your cash can cover 50 years of expenses for a total of 75 years from today?
Interest rates are rising with the tapering news.
So far you are the most conservative person I’ve come across in terms of net worth allocation who has spoken openly. Any plans with your cash?
Sam, currently my stocks would only cover 5 years of living expenses. I’m assuming a 7 percent return over the next 25 years in order to cover another 25 years of expenses.
The conservative comment made me smile. Im 42 years old and plan on retiring in 2 years. For the last 20 years I’ve had 80 to 90 percent of my assets tied up in my business. Some people would consider that extremely risky! During this transition to retirement I’m pulling assets out of my company, turning them into cash. This cash assuming a zero rate of return will cover 25 years of living expenses.
As far as what I’m going to do with this cash? Thats is one of the main reason I love your site! My plan was to dump the whole nut in a CD or a treasury at 6 percent and never have to worry again. Obviously, I can’t find that now so I’m turning to your site, as well as others to find alternative investment ideas.
Ah yes, no more 6% CDs or Treasuries out there that’s for sure!
I like your example of being a business owner with 80-90% of your assets tied up in your business. That is ALL-IN basically, and the American dream! I admire your route tremendously, and this is the journey I’ve taken now.
My business is still a small percentage of my net worth, but I want to grow it to 30-50%. If I do, then I think I’l be able to rest easy and know there’s nothing left for me to prove.
Interesting, 63% of the voters are holding between 1% and 20% in cash. Sounds a little low to me. I’m one of the 9% with 38% of my net worth in cash. 43% is in real estate. The rest is in stocks/bonds/and a small business.
What do you plan to do with the 38% in cash?
I don’t know. I’ve never been so confused as what to do with the cash. I’m trying to get it down to 25% of net worth. Perhaps take 13% and do 1/3 GOLD, 1/3 Total Stock Fund (VT), and 1/3 Total Bond Fund (BND). At least I’ll sleep at night.
Sam:
Great post. And you are so right. A big percentage loss on a small portfolio may be tolerable but not so on a large one. Funny how that works…..
AND—-At some point the fluctuations (even the daily fluctuations) become more than you can bear! The amount obviously is different for each person based on their risk tolerance but I wonder about mine all the time.
At this point, I see $10,000 swings in my portfolio on good and bad days.
Its hard to watch. Could I handle double that daily gain or loss?
Its getting close to my tipping point already.
$10,000 dollar daily swings is kind of my limit for my active portfolio as well because that’s about +/-2%. I’ve got this persistent hedge fund mentality in active investing which means underperformance in a bull market.
I really appreciate you calling out greed and how many wealthy people are giving with their wealth. The college tuition assistance is something that has happened in my own extended family.
The stealth wealth point strikes again — I’ve been mentioning this to several of my friends (not that we’re wealthy) as a good mentality to adopt early on when dealing with your money.
When wealthy people donate the most to charities and education on an absolute level, and pay the most in taxes that gets redistributed to the less wealthy, I just don’t understand why the wealthy are so vilified.