During this time of economic uncertainty, there has been a rush to cash in which people have withdrawn large amounts of money from their bank accounts or retirement savings accounts and built up their cash reserves by selling off their stocks.
As expectations for future economic growth diminished and investors began reducing their risk appetites, the U.S. stock market was quick to sell-off. In the first quarter of 2020, the gross domestic product — an indicator of economic activity and growth — contracted 4.8%, pointing to a shrinking U.S. economy, according to the U.S. Bureau of Economic Analysis.
Access to cash in the short term is now at the top of consumers’ mind, especially among millennials.
There is massive uncertainty over the near term, and it’s a natural reaction to rush to cash for safety. But now there are accumulated cash stockpiles, and many investors are not experienced with managing liquid assets in the short term.
It is reasonable that people are concerned with the state of their liquid assets and how to access and manage them.
Liquid assets consist of cash, cash equivalents or anything that can easily be converted into cash. A liquid asset can easily be bought and sold in the marketplace with high demand. But an illiquid asset cannot be easily sold due to a lack of demand from investors. A nonliquid asset cannot be sold or converted into cash easily without a loss of investment.
With that, it’s important to learn why there is such a high demand for these assets and how to deal with managing them. Here are a few common questions investors often ask:
— Why the desire for cash?
— What is the immediate impact of having cash on hand?
— How do I manage these assets over the short term?
Millennials’ Desire for Cash
According to a study done by Alpha, a consumer-feedback platform based in New York, physical cash is currently in demand by younger generations, whereas older generations are more comfortable without cash on hand.
Alpha’s study shows the most cash-conscious consumer group includes people ages 35 to 44, with 64% saying “accessing physical cash right now is important or extremely important.”
Millennial wealth is underdeveloped or has yet to reach its full potential, experts say.
People who are older have more experience going through major economic disruptions, explains Rob Holland, CEO of Alpha.
“While downturns can still be severe and have big implications, older generations have lived through the economy coming back,” he says.
In addition, there’s more wealth attributed with age, which makes it easier for older populations to access cash or other sources of income and liquidity to weather the economic storm as opposed to millennials.
Millennials on the younger end of the generation’s age spectrum are going through this kind of economic volatility for the first time.
“It’s reasonable for them to be in more demand of physical cash than the older generations since they’re tight on cash to begin with before the crisis, compounded with fewer potential sources to cash,” Holland says.
Cash-strapped consumers are saving to create liquidity. They’re pulling back on big purchases due to concerns about employment. This fear is creating a cash-hoarding mentality, driving the need for liquidity to cover their personal finances to maneuver in uncertainty.
“The need for liquidity increases when uncertainty increases and people are seeing uncertainty in the macroeconomic environment, unemployment and physical safety,” Holland says.
The main concern with liquid assets is being able to access them. Whether you have money in liquidity or not, changes in behaviors and attitudes are situational for specific segments of the population.
As every generation matures, priorities change.
“Someone who has a family and a mortgage has a different perspective on how to manage their liquid financial assets than someone who is 26 or 27 and splitting an apartment. There are different responses based on circumstances,” he says.
The key to managing liquid assets in the short term during uncertain times is to make tactical decisions.
“Be thoughtful around the decisions made. The more control you have in an uncontrollable environment, the better you will be,” Holland adds.
The Immediate Impacts of Cash on Hand
It’s important to have a cash pile on hand in these uneasy times so you have money to lean on if the economy continues to decline. But in a crisis, people may end up having more cash on hand than needed.
The consequences of having too much cash on hand or sitting at a local bank are lower returns on your assets.
“Having too much can be as much [of] a problem as having too little,” says Tim McGrath, managing partner of Riverpoint Wealth Management in Chicago.
There are some attractive entry points for equities to take advantage of.
“If millennials know they don’t need the money in the next 10 years, then now is the time to put their money to work. If you think you need money in five years, you should leave it in cash and not invest,” he says.
Experts agree that the issue of holding large amounts of cash is taking losses due to inflation.
“Your money isn’t even growing at the pace of inflation each year. Sitting on cash [for the] short term is fine, as you are researching investment options,” says Mike Kojonen, founder of Principal Preservation Services, with offices in Minnesota and Wisconsin. “But having cash long term beyond your recommended emergency funds is not a wise idea.”
Managing Liquid Assets Over the Short Term
Cash management is an important job, especially amid a pandemic. The best financial move is to stock up in the short term. Now is the time to cut spending — keep your bonuses and save your tax returns to build your cash reserves.
If individuals are inexperienced with managing liquid assets, it can easily be misappropriated and present a serious risk to a person’s financial health. The big question is how to protect against it.
For those on an hourly paycheck, conserve cash where you can. If you haven’t prepared an emergency fund, the most important thing you can do is to conserve your cash.
“Having six months of working capital in cash is a safe strategy for managing liquid assets. More cash on hand is better than less in these environments,” McGrath says.
If you are a risk-tolerant or risk-averse investor who wants to keep putting your money to work, a good strategy in managing liquid assets is to first make sure you’re making the maximum contribution through your employer-sponsored 401(k) account.
“If you have excess cash in addition, then a defensive strategy would be investing in Treasurys with shorter-term securities, high-yield corporate bonds with strong balance sheets and dividend-paying stocks,” McGrath says.
Being productive with liquid assets is better than just having it sit in the bank and not working for you.
“Focus on quality companies that are well-capitalized. The stock price will fluctuate. But historically, cash-rich companies have been the most likely to weather a storm,” recommends Alano Massi, managing director of Palm Capital Management in Westlake Village, California.
Kojonen’s advice: “Look at your debt first. If you’re carrying any high-interest credit cards or student loans, consider paying them off. This will give yourself an immediate return on investment by eliminating 7% to 22% interest rates.”
Thinking about how to organize and prioritize your liquid assets gets down to the basics.
If liquidity is a concern for you, don’t be afraid to lean on your vigilance and make measured choices around how you use your liquidity, maintain it or have it grow for you in your investment account.
More from U.S. News
Managing Your Liquid Assets During the Market Downturn originally appeared on usnews.com