Is Millennials' Love of Cash Costing Them Millions?

Millennials think cash is the best long-term investment, while older investors prefer stocks, according to a new Bankrate.com report.

Three in 10 millennials say cash is their favorite long-term investment, versus 24% of investors overall. Nearly one in five millennial investors holds no stocks in their portfolio, according to recent Vanguard research.

"Millennials profess a love for cash that shows their economic skittishness, while demonstrating a risk intolerance that could cost them big-time when they stop working," according to Bankrate.

Millennials would lose out in a spectacular fashion if they acted on this bias, according to the report. For an example, Bankrate looks at a 22-year-old worker planning to retire at 67 that saves 10% of a $50,000 salary in his or her 401(k).

If that worker invested in a money market fund yielding 2%, he or she would end up with about $359,000 by the time he or she retires, according to the report.

If instead that worker contributed to a balanced fund of stocks and bonds which yielded 8% annually — which the report says is similar to the performance of the Vanguard Wellington Fund over the past 15 years — he or she would have $1.9 million.

While millennials profess a love for cash, the report finds that when it comes to how they actually invest their retirement savings, they are as accepting of stocks as earlier generations.

Three-quarters of the retirement portfolios for those in their 20s comprised stock funds or target date funds, according to an Employment Benefit Research Institute report. Meanwhile, those in their 30s owned more stock than those in their 40s, who owned more stock than those in their 50s, and so on. Cash investments made up just 1% of the portfolio for younger millennials and 2% for those in their 30s.

And according to Vanguard, extremely risk-averse millennials are a minority — the typical millennial investor holds an age-appropriate 90% of their portfolio in stocks.

According to Greg McBride, Bankrate chief financial analyst, "For investment horizons of longer than 10 years, the stock market is an entirely appropriate investment. Cash is not, and especially if you're not seeking out the most competitive returns."

Bankrate reports that just 6% of respondents said they're earning more than 2% on their cash, equivalent to the upper limit of the Federal Reserve's short-term interest rate target. More than a quarter did not know what the were receiving, while another 13% aren't getting any interest at all.

Millennials were the least likely to receive more than 1.5%, according to the report.

The question, then, is why do millennials claim cash is their favorite asset when it isn't?

According to Bankrate, millennials may avow a love for cash because they are in such desperate need for it.

Households helmed by those under 35, according to the Fed, owned $2,600 in median savings in 2016, about a quarter of the average total amassed by the Silent Generation. In addition, reports show that millennials are putting off starting a family due to record levels of student loan debt and high housing costs, leaving them less margin for error.

"Given that anxiety, millennials may say they prefer cash because it's hard to imagine owning funds you won't need in a decade," the report states.

This study included 1,000 completed interviews, weighted to ensure accurate and reliable representation of the total population, 18 years and older.

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