The hidden cost of playing it safe with cash

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

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 

  Growth over 20 years 

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.