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Hewison Insights

Is Cash really King?

Simon Curtain
Partner/Private Client Adviser
14 May 2012

We’ve all heard the slogan: “Cash is King”. But is it really?

Over the last few years, investors have been investing more and more in Cash as a safe haven to protect against the uncertainty caused by the GFC and European Debt Crisis. Recent data released by Multiport shows that self managed superannuation funds (SMSFs) hold around 23 per cent of their assets as cash and term deposits.

This equates to around $100 billion sitting in cash!

With the Reserve Bank of Australia (RBA) lowering the cash rate to 3.75 per cent last week I think it is high time for investors to have a good hard look as to whether or not Cash is really the place to be right now.

In nominal terms, Cash is the ultimate defensive asset; it does not go down in value. But when we factor in the effects of inflation, holding Cash for the long term can be counterproductive. If Cash is returning 3.75 per cent per annum, and inflation is 2 per cent per annum, then the real return on your Cash investment is 1.75 per cent per annum – nothing to write home about.

In comparison, the dividend yield on some blue-chip Australian shares is more than double the cash rate. For example the dividend return on the Big 4 Banks is between 9% and 10% per annum!

These returns are for company dividends only and do not take into account the prospect of capital growth over the longer term.

With falling interest rates I would expect the level of cash held by SMSF’s to reduce over coming months as super fund Trustee’s see the value, and returns, offered by other asset classes like Australian Shares.

While Shares are certainly a more risky investment than Cash, if you are careful to minimise risk by selecting quality shares and plan to invest for the longer term then history shows that the capital value of your shares should grow over time.

Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email info@hewison.com.au or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.