Investors’ Cash Allocations Determined by Anticipated Expenses and Investment Opportunities

Last month’s Asset Allocation Survey special question asked AAII members which factors primarily determine how much of an allocation to cash they maintain. Note that some respondents mention multiple factors, allowing them to fall under more than one category.

More than one out of three respondents (37%) say that their allocation to cash is primarily determined by their anticipated expenses over a specific period of time, ranging anywhere from a month’s worth of expenses all the way to five years’ worth of expenses. This compares to 23% of respondents who say that the primary factor determining their cash allocation is investment opportunities that are expected or may arise, such as dips in the stock market.

About 17% of respondents say that they let market conditions, such as volatility and low stock prices, determine their cash allocation, while 6% say interest rates and 3% say dividend payouts. Additionally, 5% say that they determine their cash allocation based on whether they’re retired or close to retiring, compared to 4% who say they only keep enough cash to cover their required minimum distributions (RMDs) for one to two years.

Here is a sampling of the responses:

• “One to two years of cash for living and volatility of the market.”
• “Ability to seal high-return investments and RMD needs.”
• “The ability to take advantage of market drops and my need, or lack thereof, to take risk in order to meet my goals.”
• “Perceived risk of the overall market. The impending election and uptick in coronavirus cases has driven my recent retreat to cash equivalents.”
• “Bond rates are so low I might as well keep more in cash and await opportunities.”