A recent study from UBS Wealth Management Americas shows that kids aged 21 to 36 have 52% on average in cash.
Unless you are about to buy a house, execute a major drug deal, or flee to Mexico, there is no reason to have 52% of your assets in cash.
Young people avoid investing in stocks because they endured the dot-com crash and financial crisis in their formative years. The market seems risky.
But holding cash is equivalent to investing in a negative-yield bond. This cash holding would have underperformed the S&P 500 by 30% last year. An investor who chooses this zero-return strategy runs a risk of not being able to save enough for retirement.
People often confuse uncertainty and risk, when the option with the most certainty is often the riskiest. A cash allocation is a certainty that depreciates at the rate of inflation.
Higher education is also a frequently-mistaken risk aversion strategy. There is a lot of certainty associated with an advanced degree. An engineering PhD at least guarantees you a six-figure salary at a boring company.
However, just as a 0% return ended up being a really lame outcome for 2013, a career at Intel might end up being a really lame outcome for an EE PhD. By choosing a low-risk strategy for six years, the PhD student gambled away the most priceless asset of all.
Sometimes the biggest risk is to not take any.