On a quest for strong returns driven by a high interest rate environment, young investors have reportedly made a beeline to cash allocations.
eToro’s latest Retail Investor Beat (RIB), which surveyed 1,000 retail investors in Australia, observed that over half (54 per cent) aged 18–34 turned to cash in the last six months, compared to 28 per cent for over 55.
It bucks the trend for older investors favouring liquidity as they head closer to retirement, eToro noted, with young investors twice as likely to have increased their allocation to cash assets such as savings accounts.
When asked for the motivation behind this decision, “strong returns are guaranteed because of high-interest rates” was the most cited reason across both the younger age group (29 per cent) and over-55s (30 per cent), followed by “ease of access” (24 per cent and 18 per cent, respectively).
Additionally, some 16 per cent of young investors, compared to 3 per cent of over 55s, said they increased their cash allocations as it was easier than investing and required less monitoring.
The platform added that, in the study, questions around cash allocation were asked only to those investors who hold cash assets in their portfolio (69 per cent).
It is the most held asset class in Australia, eToro said, followed by domestic equities (54 per cent), crypto assets and foreign equities (both 30 per cent).
“With the cost-of-living crisis having a greater impact on the younger generation in 2023, we’ve seen a dash for cash in the last six months of the year. Soaring mortgage costs, rent, and bills have caused investors to put investing on the back burner,” said Josh Gilbert, eToro market analyst.
“Investors see a need for easy access to their money as they continue to weather higher living costs, whilst still getting some of the best returns on cash that we’ve seen for over a decade.”
Mr Gilbert highlighted that given consumer confidence reached record lows in Australia in the last year, it was not surprising for investors to have opted to build up their cash reserves instead.
Looking into how young Australian investors intended to use their cash, some 42 per cent said they were building it up, ready to reinvest. Just under 20 per cent cited higher rental or mortgage payments and 16 per cent said they needed to hold more cash as they are trying to buy a home.
“What is interesting and good to see is those that have turned to cash are most likely to reinvest when the time is right. With 2024 set to see inflation fall further and central banks cutting interest rates, younger investors may feel more confident increasing their investment contributions, especially after such a positive year for markets in 2023,” Mr Gilbert said.
“The younger cohort of investors clearly understand the benefits of long-term investing, hence why they want to be back in markets, with 42 per cent saying they plan to reinvest when the time is right for them.
“However, it’s also great to see those very investors identifying risk and understanding any investments should be made long term.”
In September last year, the State Street Holdings indicators, which capture the share of investor portfolios allocated towards equity, fixed income and cash going back to 1998, revealed that long-term investors’ allocations to cash rose a further three-tenths of a per cent to 20.4 per cent.
“Investors are hiding in cash once again in the face of combined equity and fixed income market weakness,” commented Michael Metcalfe, head of macro strategy at State Street Global Markets.
Similarly, the Bank of America Global Fund Manager Survey found cash allocations rose to 5.3 per cent in October.
Stockspot’s ETF report also found there had been more than $1.6 billion in inflows towards cash ETFs in 2023 alone, becoming one of the largest growing areas in the Australian ETF market.