Once a Wall of Cash, Now a Millstone -- Time to Diversify?

At one point in 2018 the Wall looked like it was beginning to crack as funds started to filter into other assets, like property and equities.

But in 2019 things began to slow down, followed, as we all know, by the biggest crisis in living memory, COVID-19. The Wall -- the amount of funds stored in cash deposits – is back, and it looks stronger than ever. Australians have salted away A$1.123 trillion, according to APRA.

Before we go any further, we need to define what we mean by cash. Cash is any asset with an interest component but no capital growth, unlike its fixed interest peer.

It easy to see why investors have flocked to cash over the years; the Rudd Government’s bank guarantee program is still in place for any deposit under $250,000. You can’t lose your capital base and it’s near enough to risk-free -- or is it?

The return of the ‘Wall’ was laid bare at the start of May when three of the Big 4 banks -- Westpac, ANZ Banking Corporation and National Australia Bank -- reported a surge in customer deposits over the past 18 months. Westpac was the standout with a $26 billion increase in customer deposits from September 2019 to March 2021

This has happened at a time when cash interest rates have reached record lows. The RBA set the cash rate at 0.1 per cent in March 2020. That isn’t going to change for another three years, according to the bank’s latest statements.

So, what kind of return has the Wall actually achieved?

If we look at the average rate you can get for a 12-month term deposit, that sits at 0.82 per cent. If you shop around, the best rate going is 1 per cent.

That means that if you were to deposit $50,000 in the best rate going you would receive $500 after 12 months with no growth in the capital base. There is something else you should consider here too – inflation, which currently sits at 1.4 per cent. If you were to apply the inflation rate to that $500 of interest gained it’s actually worth -$200 come maturity.

Thus the Wall of Cash should more accurately be described as the Millstone of Cash – it is a burden on your asset returns and capital growth.

Let’s take that $50,000 and invest it in the average cash exchange traded fund (ETF) security, which is a blend of the cash rates on the market. Then, let’s compare it to a conservative allocated portfolio where 64 per cent of the portfolio is fixed interest and cash (so you are still investing some of your funds in cash) and the remaining 36 per cent is allocated to listed property and domestic and international equities.

Here is what your total return would have been if you invested in cash or the conservative allocated portfolio, from 1 Jan, 2015 to 7 May, 2021.

The final outcome would be $56,734.32 for cash compared with $70,118.12 for the conservative portfolio.

This not only highlights the significant difference in return for your invested $50,000 but also illustrates the risk of holding just one asset class, even if that asset is the least risky asset class out there.

This is why diversification is core to all things investing. Diversification gives you the ability to smooth out the risk each asset classes experience individually by allocating a portion of your investment capital to each.

So, with cash now becoming a millstone for your returns, is it time to think about diversifying?

To find out more please chick here: https://www.investsmart.com.au/invest-with-us/investsmart-conservative-portfolio