Why Do The Rich Hoard So Much Cash? (2024)

If you have a top 1% net worth, you're rich. Good for you. The question is: why do the rich hoard so much cash? If you also have a top 1% income, there is no need to have such a big savings balance.

The rich are bullish on the economy just like the investing middle class. The difference I've noticed from surveys and speaking to people of both classes is that the rich hold much more cash (risk free assets) as part of their net worth as compared to the average person.

Citi Private Bank came out with a survey of 50 representatives who manage high net-worth families that nearly two-thirds of their clients think it's more likely the stock market will go up at least 10% in the coming year than lose value. I can get behind this bet.

Yet these same wealthy investors have, on average, almost 40% of their portfolio in cash with stocks averaging only 25% of their portfolios! The rest are in bonds, commodities, and real estate. 40% is a shockingly high number that completely goes against the wealthy class's beliefs about the future.

I get prodded by young investors who've never seen a bear market all the time on why I have some of my net worth in 3.5-4.2% yielding CDs. Usually I just smile and move on because there's no use arguing when times are good because everybody thinks they're a genius.

This post attempts to understand why those with financial means stay conservative even in a raging bull market. I've spoken to dozens of multi-millionaires about their net worth asset allocation and have found similar, but not as extreme high cash allocations. These findings run very counter to the young bucks I encounter with $150,000 stock portfolios that make up 90%+ of their net worths.

Why Do The Rich Hoard So Much Cash

1) Easy come, easy go.

Most rich people did not inherit their money. Their fortunes were either created through hard work, risk taking, savvy investments, aggressive savings, or a combination of everything. When you are self-made, your appreciation for money goes way up because money wouldn’t be there without your efforts. Rich people realize they can return to non-rich status in the blink of one bad investment.

If you lose 50% of an investment it takes a 100% return to get back to even. There have been too many downturns over the past 15 years to be fully invested in any asset class. Diversification is more important for the rich because their main goal is to protect their fortune at all cost. If you're taking investing advice from someone who only started in 2008-2009, you deserve to lose all your money.

2) Opportunity.

The rich hoard so much cash because they are always looking for investment opportunities.

One of the main reasons why rich people are rich is because they recognize investment opportunities when they arise and jump all over them. I mentioned in a previous post that we should never stop fortune hunting because if you never look, you're almost guaranteed to never find opportunity. Very rarely does something just fall in our lap. Some opportunities are probably staring us in the face right now, but we don’t have enough imagination or guts to make a move.

3) Satisfied with what they have.

Once you’ve built a large enough financial nut, the goal shifts from growth to protection of principle. In a large way, rich people with large cash balances are the least greedy of all because they’ve discovered what's enough to make them happy. There's no need to chase after the next hot growth stock.

The incremental desire to make another $100,000 when you've got $5 million isn't very strong. But the desire to protect a 3% risk-free, $150,000 a year cash flow stream is very important if the individual can comfortably live on such an amount. It's common practice for the media to portray the rich as greedy which is why every single rich person is encouraged to practice Stealth Wealth.

4) Responsibility to others.

Rich people feel the duty to support others who are less wealthy. If you are the only rich person in your extended family, you may be called on to pay for your niece and nephew’s college tuition as one rich person I interviewed explained for example. You may feel obligated to consistently give to charity who has depended on your money for years.

No matter how hard you worked for your money, you’ll feel an elevated responsibility to give back in part because you are surrounded by people and images of people who have less. By having lots of cash on the balance sheet, the rich can give much more freely. I'm pretty confident the rich are actually much less greedy than the middle class because when you have money, your actions are no longer dictated by making more money anymore.

Related: Strong Reasons For Hiring A Financial Advisor Or Investment Manager

5) Increased happiness.

The rich hoard lots of cash because they ultimately want to have peace of mind.

As we've learned in a previous article, saving more money continuously increases happiness compared to making more money where happiness plateaus around $150,000 – $200,000 a year. Cash is King except for in a bull market. That said, having a ton of cash on hand provides a pece of mind no other investment provides. The cash amounts are highly correlated with the rich person’s minimum standard of living to be happy.

If the rich person can be happy living off their cash, then everything else is gravy. It’s like going to the casino and betting with the house’s money. You can’t lose unless you draw down your cash and leverage up in a bad investment.

Related: Solving The Happiness Conundrum

6) Greed

At least, we come to the topic of greed. The rich clearly hoard so much cash because they are greedy, just like the rest of us. It is human nature to always want more, especially if we keep comparing ourselves to other people.

The billionaires in San Francisco could easily donate some of their wealth to help eradicate homelessness. But they do not, because they want to keep more of their billionaires. Even though they can't spend all their money, they always want more because they can't stop comparing themselves to even richer people.

We could all do more to donate to charity. Money and time.

Enjoy The Good Times While They Last

Those who are not rich surely experience the above five points to some degree as well. However, I think the difference is more pronounced the more you have because our risk tolerance does not commensurately increase in an absolute dollar level.

For example, if a person loses 30% in their $200,000 retirement portfolio, that’s a $60,000 loss down to $140,000. $60,000 is a lot of money that will surely sting. However, the $60,000 is recoverable through even a median household income of $52,000.

If one loses the same 30% on a $5 million portfolio, recovery is extremely difficult unless the person’s income is in the multiple six figures or more. As a result, those with larger net worths tend to be more conservative with their investments. A 25% allocation of a $5 million net worth is still $1.25 million.

The most common case for someone with a multi-million dollar investment portfolio is an older person who invested for decades and is now retired. Given the weakened earnings power of the older individual, there is no way s/he will rational invest as s/he once did.

The pain of losing a certain amount when we are rich vs. when we are poor is not the same due to the absolute dollar amounts. Therefore, they have a lower safe withdrawal rate in retirement. It's natural the rich hoard more cash the higher their net worth.

Hoard Cash, But Spend It As Well

It’s easy to say you’ll invest during economic Armageddon when you aren’t in economic Armageddon. It's easy to say you hope for a pull back when you don't have much money. But nothing happens in a vacuum. If there is another economic disaster, that also means your income and your job are also at risk. I firmly believe you only know your true risk tolerance when you are in the middle of chaos.

The bull markets in stocks and real estate have lasted since 2009. Valuations are fully valued in my opinion. There might very well be a pullback, especially if we start seeing aggressive tapering. The one thing we have going for us is that the government is in absolute cahoots with investors.

The Federal Reserve would never do something as stupid as pull the entire bond buying rug out from under us. It's all about being very accommodative for as long as possible. If there is a pullback, let's hope you have a hoard of cash to take advantage!

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