Millennials are hoarding cash. That could hurt them in the long run.

Cash, nan eventual information plus successful nan world of investing, is abruptly nan hottest waste and acquisition connected Wall Street.

Even pinch nan S&P 500 up by 22% this year, Americans person poured much than $230 cardinal into money markets: costs holding rate and short-term debt. Typically, rate is reserved for investors who want protection successful times of turbulence — nan proverbial stashing of money nether nan mattress. But 2024 has been nan second-biggest twelvemonth for redeeming money since nan 1970s, down only 2023.

What's notable astir this formation to rate is that it's not nan babe boomers hoarding dollars for retirement; it's millennials adding to their reserves.

In a June study by Bank of America's wealth-management limb connected really able Americans were approaching their finances, nan bank's analysts recovered that complete nan past 2 years, 55% of investors betwixt 21 and 43 had accrued their rate holdings, compared pinch 46% of investors 44 and older. That wasn't conscionable young group who sewage worried astir nan system aliases nan risks of a abrupt sell-off: The study besides suggested that younger respondents had rosy views of nan system and their finances.

I saw nan aforesaid puzzling inclination successful investor surveys during my clip astatine eToro, a well-known unit brokerage firm. At nan extremity of 2023, 63% of investors 44 and younger told america they had accrued their rate allocations successful nan past six months (versus conscionable 27% of investors 45 aliases older). This, contempt nan truth that younger investors were much optimistic astir nan economy, their incomes, their surviving situations, and their investments.

There's thing driving younger Americans to prevention their cash, and I don't deliberation it's solely nan 5% savings rates.

Millennial investors person been profoundly scarred by 2 life-changing crises successful their young lives. For galore millennials, nan world financial situation deed conscionable arsenic they were entering their moving years. About a decade later, a once-in-a-generation pandemic — and 2 achy carnivore markets — delivered different rustle to their psyches.

And now, successful nan premier of their investing years, nan echo of those events has made them risk-averse successful their investments. Millennials whitethorn beryllium protecting themselves good pinch their expertise to save. But erstwhile wealthiness is built connected compounding returns complete agelong periods, their distrust of nan banal marketplace could group them backmost successful nan agelong run.

Young investors person go synonymous pinch rampant speculation: They trade zero-day options, hop connected the meme-stock rocket, aliases take utmost risks successful nan sanction of social-media clout. Sure, immoderate investors adopted this devil-may-care attitude, and I'll ne'er judge personification for doing what they want pinch their ain money. But if you look astatine difficult numbers from nan Federal Reserve astir what millennial investors really own, you tin spot that this stereotype is misguided.

Despite their coming of property successful 1 of nan longest stock-market rallies successful history, millennials had 19% of their full financial assets successful rate arsenic of June 30, nan astir of immoderate generation. In a way, this makes consciousness — nan younger you are, nan little clip you person to put your money toward different investments. When you comparison millennials' rate levels pinch Gen X's rate levels astatine nan aforesaid age, though, nan consequence aversion becomes clear. If you were calved correct successful nan mediate of nan millennial generation, you're now 36. These "median millennials" held much rate arsenic a stock of their full assets during their 20s than Gen Xers did astatine those ages — a quality of astir 13 percent points.

What's worse, though, is that millennials avoided stocks during immoderate of nan champion years for investors. As our median millennial grew from 21 to 30, nan S&P 500 grew by an mean of 11.5% annually, while savings accounts paid adjacent to thing because of nan Fed's zero-interest-rate policy. Millennial savers didn't conscionable springiness up a precious decade of compounding — they missed 1 of nan longest bull markets successful history.

While nan spread has started to adjacent now that astir millennials are successful their 30s, nan study information suggests nan millennial rate obsession hasn't rather fto up.

There are plentifulness of reasons for nan caller uptick successful rate allocation. Savings and money-market rates leaped arsenic precocious arsenic 5%, giving investors charismatic risk-free returns; geopolitical upheaval intends nan world feels highly shaky; and Wall Street pros person been warning astir a recession for complete a twelvemonth now. But erstwhile it comes to younger investors, I deliberation nan scars tally deeper than worries astir a coming downturn.

Millennials person had a tumultuous induction into adulthood. Many of them were successful precocious schoolhouse aliases assemblage aliases successful their early moving years during nan world financial crisis. From 2009 to 2014, nan unemployment complaint was 10% aliases higher for 20- to 24-year-old Americans. They learned to prioritize rate arsenic they navigated 1 of nan worst downturns successful history. Then, conscionable arsenic they were uncovering their footing, nan COVID-19 pandemic hit. We were locked wrong our houses for weeks connected extremity while stocks entered 1 of their swiftest crashes connected record. Soon after, we nervously waded backmost into nan wealth-building waters, only to get deed by scorching ostentation and different carnivore market.

Every procreation has its warfare stories. Gen Xers had to process 9/11 and nan tech bubble bursting successful their precocious 20s. Baby boomers dealt pinch their ain bout of ostentation and precocious rates arsenic 20-year-olds successful nan 1980s. Their parents were unfortunate capable to acquisition nan Great Depression, a three-year agelong of nan darkest economical days successful nan United States. But there's thing particularly pernicious astir having to navigate not 1 but 2 earth-shattering crises early successful adulthood.

Money tin beryllium a highly individual subject. Our feelings of financial stableness create done experiences, not classes aliases textbooks. A 2017 University of Michigan study recovered that children arsenic young arsenic 5 could commencement processing spending and redeeming habits. There's besides a ton of research that suggests financial stress tin lead to a litany of physical, mental, and affectional issues. Early financial trauma tin profoundly style your narration pinch money. That's why individual finance tin consciousness truthful illogical astatine times — why immoderate of america whitethorn beryllium group connected insubstantial but perpetually fearfulness losing it all.

I cognize this well. I'm a young millennial who felt nan financial situation arsenic a teenager. My mom was a part-time bookkeeper astatine a lodging building company, and my dada was a residential electrician. You could astir apt conjecture what happened erstwhile nan lodging marketplace went into a tailspin. I whitethorn not person been aged capable to unfastened a brokerage account, but I picked up immoderate perverse money habits from nan financial situation that I'm trying to unlearn — moreover now, arsenic nan caput of investigation astatine a patient that teaches group really to build wealth. Multiply this mentality crossed a generation, and you person 1 swath who brought america crypto, Occupy Wall Street, meme stocks, and YOLO capitalism, and different batch that can't look to return capable risks to build a decent status fund. These much cautious ones piled their savings into inflation-linked I-bonds — super-safe government-issued indebtedness that locks distant your money for a twelvemonth — erstwhile they deed 9% successful 2022. A awesome determination for an emergency fund, but little savvy erstwhile nan banal marketplace is plumbing caller lows.

Saving excessively overmuch money seems for illustration a bully problem to have, but keeping each your money successful a savings relationship tin beryllium a immense financial correction erstwhile you see nan opportunity cost. Imagine you put $1,000 successful a savings relationship successful July 2023 — astatine nan highest of nan Fed's complaint hikes — earning a saccharine 5% APY connected your cash. By October 4, you would've earned astir $60 connected that money.

How does that comparison to stock-market returns? Not great.

By staying successful rate complete nan past twelvemonth and change, you missed a 27% rally successful nan S&P 500. In different words, that $1,000 would've turned into astir $1,277 if you'd invested it successful a no-fee scale fund. There were beardown gains to beryllium had successful different awesome indexes, too: a 28% climb successful nan tech-heavy Nasdaq 100 and an 18% emergence successful nan mega-company Dow. Yes, moreover your grandma's scale hit your rate return.

Of course, stocks and rate are different financial beasts. Cash tin beryllium dependable successful reliable times, and it's often nan champion spot to stash distant costs for a large purchase. It besides makes consciousness to person immoderate rate connected hand. Stocks, by contrast, are often acold from stable. Lots of celebrated stocks person dropped 10% to 20% of their worth successful a azygous day, and you could theoretically suffer each your invested money successful nan banal market. But arsenic scary arsenic that sounds, it's nan principle of risk-taking; you springiness up stableness for perchance greater returns complete time. If you person decades up of you arsenic an investor, you're successful a premier spot to return immoderate risks. Every small spot matters, too. Over agelong periods, nan quality betwixt 5% and 6% returns connected a $1,000 finance tin beryllium thousands of dollars. For what it's worth, nan S&P 500 — an scale of America's largest companies — has grown by astir 8% a twelvemonth complete nan past 2 decades.

The semipermanent mathematics favors shifting distant from cash, and nan short-term calculus is changing, too. Because nan Fed started cutting liking rates successful September, you're slow losing that sweet, saccharine savings complaint — mean money-market rates person slid to 2.75% from 2.9% astatine nan extremity of July.

Fellow millennials: As a marketplace nerd who studies really nan wealthiest Americans get rich, I'm begging you to extremity playing it safe. Cash whitethorn consciousness for illustration a warm, fuzzy blanket, but you're not getting thing done conscionable lying location connected nan sofa bingeing Netflix. Holding rate arsenic an emergency money aliases a location down costs makes sense. Staking your status connected rate doesn't.

Risk is nan instauration of wealth-building, truthful get disconnected nan couch.

Callie Cox is nan main marketplace strategist astatine Ritholtz Wealth Management and nan writer of OptimistiCallie, a newsletter of Wall Street-quality investigation for mundane investors. You tin position Ritholtz's disclosures here.