Finance in the News and Class Discussion: Investors Move Toward Cash

To say the least, it’s been a troubling time in the stock market over the past few years.  As a result, many young investors are moving out of common stocks and into cash just when they shouldn’t be.  Earlier we discussed The Wall Street Journal article “The Young and the Riskless” and the fact that Risk and Return Go Hand-in-Hand as we learned in Chapter 1, Principle 8.  Moreover, in Chapter 11 in the section titled  “Meeting Your Investment Goals and the Time Dimension of Risk“ we discussed why it makes sense to take on risk when you are young and your investment time horizon is long.

This trend toward taking less risk and putting investment funds in cash was recently documented in the MFS Investment Management survey “Shift to Cash is Deliberate, Fundamental Change for Investors.”

Some of the findings of this survey were:

  • Investors surveyed had on average 26% of their portfolio in cash, with Gen Y investors (that is those between 18 and 30 years old) having the highest cash position, 30%.
  • One-quarter 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.
  • Younger investors, especially Gen Y, need to see an improvement in their personal wealth (Gen Y, 34%; Gen X (those 31-45), 30%) or overall personal situation (Gen Y, 37%; Gen X, 32%) before feeling comfortable investing in the stock market.

Discussion questions:

  1. Read the press release from the MFS Investment Management survey “Shift to Cash is Deliberate, Fundamental Change for Investors.”  Do you share the same fears that other young investors have (look at the section “Cash: driven by fear”)?  Be prepared to discuss this in class.
  2. After reading the press release from the MFS Investment Management survey “Shift to Cash is Deliberate, Fundamental Change for Investors.”  What are the financial consequences to young investors if they avoid the stock market for the reasons they give (look at the section “Cash: when will it move back to equity?”)?

 

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