InvestSMART

The hidden cost of playing it safe with cash

Keeping some cash on hand makes sense - but holding too much could cost you more than you'd think.
By · 3 Jul 2025
By ·
3 Jul 2025 · 5 min read
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For years, evidence has shown that Australians are among the most risk-averse people in the world. This cuts across all demographics, impacting everything from the classroom to the boardroom, and even our attitudes towards investing. 

This is especially clear when you look at how Aussies treat cash. While technology is pushing us toward a cashless society, many people still have cash stashed at home. The Reserve Bank estimates that between 55% and 80% of all banknotes in circulation are being hoarded. 

Recently, my own grandfather sheepishly admitted he had buried a bag or two in the backyard and agreed it was time to get the shovel out of the shed. He's still going strong at 101, and that cash is now earning some interest instead of being devalued by inflation in the ground.   

There are also plenty of investors who use cash as the defensive centrepiece of their portfolios. According to ATO data from March 2025, self-managed super funds (SMSFs) held $161.6 billion in cash and term deposits - around 16% of their total assets. That makes it the second-largest asset class, behind listed shares at $265.7 billion (26%). 

But what's the bigger picture here - and what might our conservatism with cash really be costing us? 

Here are some facts to consider: the average cash rate over the past 10 years has been just 1.76% per year, and over 20 years, it's only 3.12% a year.  

Sure, banks and other financial institutions may have offered higher rates on term deposits or savings accounts, and deposits of up to $250,000 per account holder are guaranteed, but when you compare those rates to the returns of diversified indices over the same periods, the gap is striking.  

Take a look at the table below. Each of these indices includes exposure to cash, bonds, infrastructure, and Australian and international shares in varying amounts, based on their risk profile. As you can see, returns range from 4.1% to 8.6% over 10 years, and 4.8% to 8.8% over 20 years.  

Of course, past performance is no guarantee of future returns - but it's a good reminder that while cash feels safe, it may not always be working as hard for you as it could. 

Performance of diversified indices

Risk profile 

Morningstar benchmark

10 yr
return (%p.a.) 

20 yr
return (%p.a.)

Recommended
timeframe 

Conservative 

Moderate Target Allocation NR AUD

4.07% 

4.8% 

2-3 years  

Balanced 

Balanced Target Allocation NR AUD

5.61% 

6.3% 

3-5 years 

Growth 

Growth Target Allocation NR AUD

7.08% 

7.9% 

5 years 

High Growth 

Aggressive Target Allocation NR AUD

8.60% 

8.8% 

7 years 

Returns to 31 May 2025. 

The hidden cost of cash

When you put it in dollar terms, the returns we're potentially leaving on the table are pretty staggering. Let's say you invested $100,000 in cash. Over 10 years, your initial investment would have grown to about $119,000.  

If you had taken on a bit more risk and invested it in a balanced portfolio, you'd have roughly $53,000 more than if you had stuck to cash.  

Now, if you had dialed up the risk even further and opted for a high-growth option, your $100,000 would be worth $228,191 - almost $110,000 more than you'd have if you invested in cash. 

The numbers become even more dramatic over 20 years. The difference between investing $100,000 in cash versus a high-growth portfolio adds up to roughly $355,000. 

Growth over 10 years 

 

Cash

Conservative

Balanced

Growth

High Growth

$10,000

$11,906

$14,945

$17,244

$19,856

$22,819

$25,000

$29,765

$37,363

$43,110

$49,640

$57,048

$50,000

$59,531

$74,727

$86,220

$99,281

$114,095

$100,000 

$119,061

$149,454

$172,440

$198,561

$228,191

$250,000

$297,653

$373,635

$431,101

$496,403

$570,477

$500,000

$595,307

$747,270

$862,202

$992,807

$1,140,954

  Growth over 20 years 

 

Cash

Conservative

Balanced

Growth

High Growth

$10,000

$18,487

$25,540

$33,936

$45,754

$54,023

$25,000

$46,217

$63,851

$84,841

$114,385

$135,057

$50,000

$92,433

$127,701

$169,682

$228,770

$270,115

$100,000 

$184,866

$255,403

$339,364

$457,540

$540,229

$250,000

$462,166

$638,507

$848,409

$1,143,850

$1,350,573

$500,000

$924,332

$1,277,014

$1,696,818

$2,287,699

$2,701,145

With all signs pointing towards further cuts to the cash rate - potentially as early as next week - it could be worth getting your metaphorical shovel out of the shed to consider your allocations to cash to further protect and grow your wealth.   


Ready to start investing? InvestSMART has a range of diversified portfolios that all come with a capped management fee. If you'd like help selecting the right style of portfolio for you, check out our free statement of advice quiz. It will show you which InvestSMART ETF portfolio may best suit your goals and investment timeframe. 

 

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Mitchell Datson
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Frequently Asked Questions about this Article…

Australians are known for being risk-averse, which leads many to prefer keeping cash at home. Despite the push towards a cashless society, a significant portion of banknotes are hoarded, reflecting a cautious approach to financial security.

Holding cash as an investment can lead to missed opportunities for higher returns. Over the past 10 years, cash has yielded an average return of just 1.76% per year, significantly lower than diversified investment portfolios, which can offer returns ranging from 4.1% to 8.6%.

Inflation erodes the purchasing power of cash savings over time. While cash feels safe, it may not keep up with inflation, leading to a decrease in real value and potential loss of wealth.

Diversifying investments beyond cash can lead to higher returns. For example, a balanced portfolio could yield significantly more over 10 or 20 years compared to cash, potentially increasing wealth by tens or even hundreds of thousands of dollars.

Investment risk profiles vary in returns. Conservative portfolios may yield around 4.07% annually over 10 years, while high-growth portfolios can offer up to 8.6%. Choosing the right risk profile depends on your financial goals and risk tolerance.

Cash rate cuts can reduce the interest earned on cash investments, making them less attractive compared to other investment options. With potential further cuts, it might be wise to reassess cash allocations to protect and grow wealth.

InvestSMART offers a range of diversified portfolios with capped management fees. You can take their free statement of advice quiz to find the right ETF portfolio that aligns with your investment goals and timeframe.

Self-managed super funds (SMSFs) hold a significant portion of their assets in cash and term deposits, reflecting a conservative investment approach. However, diversifying beyond cash could enhance returns and better secure retirement savings.