Go With The Flow? America’s Rich Are Going Liquid

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‘Cash is king,' and America's millionaires are bowing down before its throne.  

Research by the Capgemini Research Institute reveals America's millionaires are stocking up on Benjamins. At the start of this year, high net worth individuals (HNWIs), meaning those worth a million or more, held over a third of their assets (34%) in cold hard cash. This is the highest cash holding rate in over two decades, up markedly from last year's 24% level. 

It's not just millionaires either; multibillionaires, including Warren Buffet, are going liquid. The famed investors' Berkshire Hathaway firm, for instance, topped up its cash reserve by adding $17 billion to its cash reserve in 2023's second quarter, bringing the total to almost $150 billion.

Many people rightly fixate on increasing their net worth, yet this trend to cash highlights the importance of liquidity plays in wealth. If one's net worth is the difference between what you could quickly get for your assets and what you owe, one's liquid net worth is the difference between what you could quickly get for your assets and what you owe. Investments vary in how liquid they are, but cash is invariably the most liquid of all. 

Regular consumers often associate cash with spending, but that's often not the case from an investment perspective. Yet precisely what kinds of people gravitate toward cash and when it makes strategic sense to do so, isn't always so clear cut. 

Dual Personalities

Cash seems to split financial personalities along the lines of risk. 

Broadly, some are risk-averse and want to hold more cash in case something goes wrong. The cash-based “emergency fund” of up to six months' living expenses is a textbook example of this. Others are inherently risk-on with their money and want to have the means to realize rare investing opportunities. By having cash in an “acquisition fund,” they can buy an online business, like a website, or perhaps a retail business, like a physical store.

Carman Kubanda, CFP and Financial Planner at Innovative Wealth Building, questions whether cash hoarding may be outdated.

“Nowadays, with access to credit cards and other modern technologies, the chances that you'll need a lump sum of more than $10K or $15K in less than a day or two is hard to conjure,” she says. “What most people don't think about is that the money in their bank account or even under their mattress is losing value due to inflation.”

“Why not move your money into a money market fund?” she asks. “If you can access those funds within 3-4 days I would still argue that is quite liquid.”

Kulbanada isn't alone in highlighting money market solutions here.

“We are seeing many investors who prefer money market funds with current yields versus a traditional investment portfolio, due to strong yields and lower volatility,” says Joe Dunat, Wealth Advisor at Sturkie Wealth Management. “There is also a growing concern about the inverted yield curve and the potential for a recession, which may lead to a drop in the overall markets.”

This year has seen a flood of cash enter money market funds, which offer almost the same features as traditional bank accounts but reward depositors with higher interest rates.

Meanwhile, those “risk-on” cash enthusiasts tend to appear in the tech space.

“In Silicon Valley, it is not uncommon for some to maintain large cash positions in order to allow for future self-funding of a startup endeavor or to make an angel investment, with the potential for returns that far exceed that of the broader stock market,” says Andy Moran, founder of Ad Astra Financial Planning.

“I work with folk in tech interested in non-linear exploration of work-optionality. Core to this planning is maintaining sufficient liquidity, usually in the form of cash and stable investments like short-term US Treasuries,” he added. 

This kind of approach is in vogue – Entrepreneurship Through Acquisition (ETA) has recently become a hot new trend for MBA graduates. However, there are risks involved. 

“HNWIs certainly have more capacity for risk-on investments in private businesses, independent of their risk tolerance,” Moran adds. “If a non-HNWI wanted to engage in this kind of speculative investing, I would have a lot of concerns as they don't necessarily have the same ability to recover if things go south.”

Investors tend to get more conservative with their asset allocations as they age. There's a logic to this – the closer one gets to retirement, the less time one has to recover significant losses from a market collapse, for instance. 

Holding cash may also provide flexibility for tax planning and paying expenses without triggering taxable events. Interest, dividends, and capital gains earned on cash holdings may be taxable but at potentially lower rates than other assets. Corporations also hold high levels of cash for this reason. Depending on the circumstances, hiring a tax accountant may make sense to optimize such strategies.

Cash-Happy Retirees

However, even when one has made their fortune and is retiring, cash comes in handy again. This is because rich retirees want to ensure they can live the good life, even during a market downturn. High Net Worth Wealth Managers often craft high-liquid strategies for their clients.  

“We specialize in retired high-networth individuals… For them, having cash on hand is very, very important,” Michael Mezheritskiy, President of Milestone Asset Management Group. “We use a bucket strategy with them since they take active distributions. We want to make sure that we at all times have at least two years of expenses in cash and 5-6 years of expenses in cash-like instruments, but hopefully with a higher yield. Treasuries, CDs, individual bonds.”

“The rest gets invested into the market, and then we shift money to replenish cash. If the market is up, it will come from growth if not, we will use the 5-6 years bucket. By following this approach and having money in cash, it really allows retirees to concentrate on the quality of their retirement rather than constantly worry about market fluctuations.”

How much cash one holds ultimately comes down to personal preference and one's risk appetite in investing. Yet, during these uncertain economic times, the necessity to have the ability to access one's assets at speed, be it with cash or other highly liquid investments, is undeniable.

This article was produced and syndicated by Wealth of Geeks