Editor’s note: This article was first published in September 2014. The market context is from then: a long bull market, record wealth held by the top 1%, eurozone stagnation and doubts about some emerging markets. Simon Smiles’s role as chief investment officer at UBS Wealth Management is also as of 2014.
Billionaires get nervous when told to invest in today’s markets. After one of the longest bull runs in the markets, the vast majority have already earned the returns they were hoping for, returns that have helped the rich set an all-time record for the share of wealth held by the top 1% of the population.
According to the new report from Wealth-X, billionaires are now also setting a record in cash holdings: on average, the wealthy individuals surveyed hold between 20 and 30 percent of their net worth in cash. It is one of the largest cash hoards on record, considering that this select group knows full well that money needs to be invested.
This build-up of liquidity shows that they are afraid of putting more money into markets they consider overvalued, and that they foresee a high risk of a severe correction. So they prefer to keep that money on the bench, waiting for prices to fall so they can put the cash back into play and take advantage of the investment opportunities that emerge after a big drop.
The chief investment officer of UBS Wealth Management, Simon Smiles, explains that this fear is very reasonable for billionaires who still have fresh memories of how psychologically painful the 2008–2009 global financial crisis was.
Add to that the steep rise in share prices in today’s markets, the stagnation of the eurozone and the doubts over some emerging economies, and the truth is that taking a very cautious approach to our investment strategy is the most advisable course.
What’s more, according to the survey, the ultra-rich are willing to run the risk of inflation eroding the value of their cash, losing some money, rather than take on the risk of bigger losses by investing in other assets.
Simon Smiles sums it up: stocks are no longer cheap, and it is emotionally difficult to invest right now.
Further reading
- The principle of wealth explained in one chart
- The 10 cheapest stocks on the market, according to Goldman Sachs
- Inflation, money and wealth
Featured image: Ank Kumar, CC BY-SA 4.0, via Wikimedia Commons.
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