This week the Reserve Bank of Australia (RBA) kept the cash rate on hold at 1.5%. This is the tenth meeting in a row rates have been on hold; with many pundits tipping rates to remain on hold for the rest of the year.

As a result, the expected return for cash continues to remain low. Despite this, recent data from the ATO reveals that self managed super funds hold around 25% of their assets in cash and term deposits. This equates to around $160 billion sitting in cash!

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 1.5% per annum and inflation is 2% per annum, then the real return on your cash is negative 0.5%. That’s right, you are actually losing money.

In comparison, the dividend yield on a diverse portfolio of Australian Shares is around 4.5%, increasing to 6.4% with franking credits. This is more than four times the cash rate!

While it is important to point out that shares are a higher risk investment than cash, if you are careful to minimise risk by diversifying your portfolio, and you plan to invest for the long term, then history shows that the capital value of your investment should grow over time, further increasing the rate of return.

Of course, as with most things in this life, there are no guarantees. And sometimes it’s best to call on an expert. If your pipes spring a leak, you call a plumber. When you need to secure your family’s future, it’s best to speak to an experienced, independent financial planner.

If you or someone you know are interested in reviewing your financial plan and investments please contact a Hewison Private Wealth financial adviser. We are Melbourne based, independent financial planners with over 30 years of experience. Contact us on 03 8548 4800, email info@hewison.com.au or visit www.hewison.com.au