Keeping risk in check
When interest rates fall, the temptation to chase higher yield by switching out of cash to alternative asset classes intensifies. But if history has taught us anything, it’s that higher yield means higher risk.
Given that Australian investors hold the majority of their wealth in growth assets, namely equities and property, the volatility that we saw in local, global and emerging market equities throughout 2018 and into early 2019, coupled with the most significant falls in Australian residential property prices in a decade, should trigger investors to question where their yield comes from.
Rather than being reactive to movements in rates and switching into other, riskier asset classes, investors may be better off taking a more strategic approach to their portfolio. Maintaining an allocation to cash can offer them some downside protection when their other investments are going south. And with the ongoing uncertainty in global economies, taking on additional risk at this time may not be in investors best interests.
Low correlation with other asset classes
The benefit of having a portfolio of assets with low correlation is that the investments are less likely to lose money at the same time. Typically, fixed income and equities are negatively correlated. This means the gains made in one investment can be offset by losses in another, reducing overall volatility within the portfolio.
However, in more recent times we’ve seen fixed income and growth assets become positively correlated to the upside, meaning there’s been gains across both asset classes. Maintaining an allocation to cash in times of volatility will provide a stable source of income no matter what is happening in other asset classes.
A safe place to protect your eggs
The old adage of not putting all your eggs in one basket is never more pertinent than in times of volatility. Even the best portfolio managers have struggled to anticipate and forecast where the markets are headed in recent times. A well-diversified portfolio should reduce overall investment risk, and having some exposure to cash can deliver that protection they need.
There when you need it
Another benefit is that cash is highly liquid, which gives investors ready access to funds should they need it. And because it’s already in the form of cash, there is little impact on the value of it when an investor moves in or out of the asset class. It also means investors can take advantage of other investment opportunities quickly because they’re not waiting for assets to be realised before they can invest. On a more practical level, having access to cash can also help deal with unexpected expenses.
Safe as houses with a bank guarantee
It’s also important that investors understand that one of the advantages of holding cash with an approved deposit-taking institution (ADI) is that deposits of up to $250,000 with each approved institution are guaranteed by the federal government. This means if the ADI goes bust, your money is guaranteed to be paid back..
A better rate is three clicks away
While it’s clear what the benefits are for having an exposure to cash in an investors portfolio, especially those transitioning to or in retirement, the key is to shop around for competitive rates to maximise possible returns.
In as little as three clicks, you can shop your way to a market competitive rate thanks to Cashwerkz. Australia’s leading marketplace for cash investments makes it easy to compare term deposit and at call account rates, select preferred investment options and monitor your investment – all in one place – making the investment management process simple and seamless. Cashwerkz also makes it easy to switch between providers so you can continually capture market competitive yields.
To find out more, call Cashwerkz on 1300 721 005 on weekdays between 9am and 5pm (AEST) or visit cashwerk.com.au/join