Cash Hoarding: Fear Or Greed?

There are many reasons why people might choose to hoard cash instead of investing it. One of the main reasons is uncertainty about the future and a desire to protect their wealth. This could be due to economic instability, such as rising inflation, or personal circumstances, such as the impact of the COVID-19 pandemic on their income and expenses.

Another reason is a risk-averse attitude, particularly among millennials who may have been influenced by the 2008 global financial crisis. They may prefer the perceived safety of cash over the potential losses of investing in the stock market. However, this approach means they miss out on the higher returns that stocks can provide over time.

Some people also hoard cash so that they have funds available to invest if an opportunity arises. This is particularly true of the wealthy, who are always looking for new investment opportunities.

Finally, some companies, particularly multinationals with large amounts of intellectual property, hoard cash in certain countries to minimise their tax liabilities.

To have peace of mind

Peace of mind is a feeling of calm, safety, and emotional comfort. It is a state of being where one is free from worry, anxiety, and stress.

Hoarding cash can provide peace of mind to people for several reasons. Firstly, having a substantial amount of cash on hand can act as a safety net during uncertain economic times. Cash reserves allow individuals to weather financial storms, such as job loss or market downturns, without having to sell their investments at a loss. This sense of financial security contributes to peace of mind.

Secondly, cash provides flexibility and freedom of choice. It empowers individuals to seize investment opportunities when they arise, make major purchases without incurring debt, and support family members or charitable causes. The ability to act swiftly and independently during times of need fosters a sense of control and peace of mind.

Additionally, cash holdings can be a source of happiness and contentment. Research suggests that saving money consistently increases happiness, whereas the happiness derived from higher earnings plateaus beyond a certain income level. Thus, hoarding cash can lead to a sense of satisfaction and peace of mind by meeting psychological needs beyond mere physical survival.

Moreover, cash can serve as a buffer against potential losses. The pain of losing a certain amount of money is more acute when one is wealthy compared to when one is poor due to the absolute dollar amounts involved. Therefore, those with higher net worths tend to be more conservative with their investments, opting to hold larger amounts of cash to protect their principal and minimise potential losses. This risk-averse strategy provides peace of mind by reducing exposure to volatile markets.

Finally, some individuals may find comfort in the simplicity and tangibility of cash. Unlike complex financial instruments, cash is straightforward and easily understood. It is a physical representation of one's wealth, providing a sense of security and control. For some, this simplicity and tangibility contribute to peace of mind.

In summary, hoarding cash can lead to peace of mind by offering financial security, flexibility, happiness, protection from losses, and a sense of control. These factors collectively contribute to a sense of emotional well-being and freedom from worry.

To have cash on hand for unforeseen events

People may choose to hoard cash instead of investing it due to a desire to have cash on hand for unforeseen events. This is especially true for the wealthy, who are more likely to have a large portion of their portfolio in cash. This is because the wealthy are more likely to be self-made, and thus have a greater appreciation for their money, knowing that it could disappear with one bad investment.

Hoarding cash can also be seen as a conservative investment strategy. In times of economic uncertainty, such as during the COVID-19 pandemic, having extra cash on hand can provide peace of mind and protect against loss. It can also allow investors to take advantage of unforeseen investment opportunities, such as buying stocks at a discount during a market crash.

Millennials are also more likely to hoard cash than older generations, possibly due to the emotional impact of the 2008 financial crisis. However, this strategy may not be in their best interest, as it could mean missing out on the higher returns that come with investing.

To have cash on hand for investment opportunities

There are several reasons why people might hoard cash instead of investing it. One of the main reasons is that they are waiting for better investment opportunities. They might be holding out for a pullback in the market, or they might be waiting for interest rates to rise so they can get better returns on their cash savings.

Another reason people might hoard cash is that they are risk-averse. They might be worried about losing money in the stock market or other investments, so they prefer to keep their money in cash, even if it means earning lower returns. This is a common mindset among millennials, who witnessed the 2008 global financial crisis and are thus reluctant to invest their savings.

People might also hoard cash due to uncertainty in the economy or stock market. For example, during the COVID-19 outbreak, many people chose to hold extra cash in case of emergency expenses or a drop in income. Similarly, companies might hoard cash to weather uncertainty or to fund new initiatives.

Finally, some people hoard cash because they are satisfied with what they have and their goal shifts from growth to protection of their principal. They might feel they have enough money to make them happy, so they prefer to hold onto their cash rather than take on the risk of investing it.

To avoid taxes

There are several reasons why people might hoard cash instead of investing it, and one of the most significant factors is taxes.

Hoarding cash is often associated with a desire to minimise tax obligations. This is particularly true for multinational corporations with substantial intellectual property assets, such as Alphabet, Apple, and Microsoft. These companies have been known to shift their profits to low-tax countries, taking advantage of the ease of moving intangible assets across borders. By doing so, they can reduce their tax burden and keep more of their profits.

The practice of hoarding cash in tax havens has been a growing trend, with foreign cash holdings increasing at a much faster rate than domestic holdings. This behaviour has been driven by the desire to take advantage of lower tax rates in certain countries, and it has had a significant impact on the global economy.

The COVID-19 pandemic also played a role in encouraging cash hoarding, as companies became more risk-averse and sought to preserve their financial stability during uncertain times.

However, it's important to note that hoarding cash can have negative consequences for investment portfolios and long-term financial goals. While having a certain amount of cash on hand is essential for emergencies and major expenses, keeping too much cash can result in "portfolio drag," reducing overall returns.

Therefore, while tax considerations are a significant factor in cash hoarding, it's crucial to balance this with investment strategies that promote long-term financial growth.

To avoid risk

People may choose to hoard cash instead of investing to avoid risk. This is especially true for those who are already wealthy, as they are more likely to be conservative with their investments. They may have a large amount of their portfolio in cash, with stocks averaging a much lower percentage. This is because they want to protect their fortune at all costs.

For the rich, a bad investment can mean a swift return to being non-rich. If you lose 50% of an investment, it takes a 100% return to get back to even. This fear is heightened by having witnessed downturns in the market.

Additionally, those who hoard cash may be satisfied with what they have and so are less driven by the desire to make more money. They may also feel a sense of responsibility to support others who are less wealthy, such as family members or charities.

Hoarding cash can also be a good strategy in times of economic uncertainty. For example, during the COVID-19 outbreak, it was unclear how the stock market would be affected, so having extra cash on hand was crucial for many. Similarly, JPMorgan Chase has been hoarding cash, waiting for higher rates because they think inflation is going up and will be here to stay.

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