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Hewison Insights

Is Cash Really King?

Simon Curtain
Partner & Wealth Adviser
19 Oct 2022

Cash is King! It’s a catch cry we often hear in the financial media. But is Cash really King? 

The Reserve Bank of Australia (RBA) has lifted interest rates over six successive months, increasing the cash rate from a record low of 0.1% to 2.6% as of October 2022. 

With the return from cash increasing, one would question if cash is the best investment or if there are other options available? Interestingly, cash investments still make up a large portion of self managed super fund (SMSF) holdings, with data from the ATO revealing that SMSF’s hold 20% of their investments 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. As you may be aware, inflation is a real concern at the moment, here in Australia and around the World. Australia’s current inflation rate is 6.1% per annum.  

Now, we don’t expect inflation to stay at this rate forever. Over the longer term, Australia targets an inflation rate of 2% to 3% each year. However, even if we use this more modest target inflation rate, the net return on cash is about zero or negative. 

That’s right, in the current high inflation environment, you are actually losing money by investing in cash. 

In comparison, a diverse investment portfolio, consisting of a range of assets from Shares to Property, as well as Fixed Interest assets, would be expected to provide income of around 5% per annum. This is almost double the cash rate. 

While it is important to point out that growth assets like shares and property are a riskier investment than cash; you can minimise risk by diversifying your portfolio and investing for the longer term. If you are able to do this, then history shows that the capital value of your investment should grow over time, further increasing the rate of return. 

 If you or someone you know may be interested in reviewing their financial plan and investments, please contact us at Hewison Private Wealth to speak with an adviser.